On a confluence of factors in the last week that include rate cut hopes and high mega-cap valuations, investors continue rotating to small-caps. Investors seeking to gain small-cap exposure with a focus on tax-efficient income would do well to consider the NEOS Russell 2000 High Income ETF (IWMI ).
The pivot from large and mega-cap technology stocks to small-caps gained significant momentum in the last week. There is speculation as to the underlying motivation. Market certainty of a September rate cut, signification valuations within technology stocks, political, or economic motivators, to mane a few. The reality remains that small caps now find themselves in favor.
The Russell 2000 Index beat the S&P 500 over seven days last week by the greatest margin on record. That’s according to Dow Jones with data that goes back to 1986, reported the WSJ.
June’s cooler-than-anticipated CPI print proved the turning point for small-caps. From July 11 through July 22, the Russell 2000 rose 4.5% while the S&P 500 fell 0.36% according to Y-Charts data.
Earnings may also prove beneficial to small-cap stocks this season. While large caps forecasts sit around a 28% earnings increase in the second quarter, it’s a decline from the 52% rise in Q1. Small caps, on the other hand, are forecast for an 18% gain in Q2 profits, breaking 5 consecutive quarters of declines.
Look to IWMI for Small-Cap Income Opportunities
The recently launched NEOS Russell 2000 High Income ETF (IWMI ) seeks to combine high monthly income within small caps with tax efficiency.
IWMI 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.
The actively managed IWMI also 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 an expense ratio of 0.68%.
For more news, information, and analysis, visit the Tax Efficient Income Channel.
