The Fed’s aggressive September rate cut could prove a boon to small-cap businesses in the months ahead. For those advisors and investors looking to expand their allocations, the NEOS Russell 2000 High Income ETF (IWMI ) is worth consideration.
Economic concerns remain top of mind for consumers and investors alike. The Conference Board’s Consumer Confidence Index reading dropped to 98.7 this month. It declined more than expected, from August’s revised 105.6.
“September’s decline was the largest since August 2021 and all five components of the Index deteriorated,” explained Dana M. Peterson, Chief Economist at the Conference Board, in the press release. “Consumers’ assessments of current business conditions turned negative while views of the current labor market situation softened further.”
Small-cap companies carry greater interest rate sensitivity and are likely to be some of the first equities to benefit from declining rates. The Fed’s shift in focus this month from inflation to preventing further labor market cooling creates a potentially supportive environment for small-caps should the regulatory body manage a soft landing for the economy.
The NEOS Russell 2000 High Income ETF (IWMI) seeks to combine high monthly income within small-cap stocks with tax efficiency. The fund provides exposure to the Russell 2000 Index alongside an options strategy designed to generate high-income potential. The fund employs a strategy using covered calls to generate premiums.
Launched June 25, 2024, the fund is up 7.06% on a total returns basis according to Y-charts data. It currently offers a distribution rate of 15.79% as of 08/31/24. Distribution rate annualizes the most recent distribution and then divides it by the fund’s NAV.
The actively managed IWMI uses call spreads to achieve its income goals. These spreads allow for more of the underlying to potentially participate in upside market movements when they occur compared to indexed covered call option strategies.
In addition to potential upside capture, the fund offers layers of tax efficiency for investors seeking income. The options that IWMI uses are call options on the Russell 2000 Index (RUT) and qualify as Section 1256 contracts. These receive favorable tax treatment under IRS rules. The options held at year’s end are treated as if sold at fair market value on the last market day. Any capital gains or losses are taxed at 60% long-term and 40% short-term, no matter how long they were held.
NEOS also actively manages the call options to capture gains in the underlying assets or minimize losses. In addition, the fund’s managers also engage in tax-loss harvesting opportunities throughout the year on the call options, equity holdings, or both.
IWMI has a net expense ratio of 0.68% on a contract that lasts through 08/28/25.
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