Investors remain cautiously optimistic regarding interest rate cuts this fall after April’s CPI print and signals of potential inflationary pressures easing. For those investors looking to add duration or enhance their income potential within bonds, the NEOS Enhanced Income Aggregate Bond ETF (BNDI ) is worth consideration.
April’s CPI print came in line with expectations after months of surprises to the upside. The reading breathed new hope for investors into potential rate cuts this fall. Markets currently estimate rate cuts beginning in September. The CME FedWatch Tool indicates a 51.8% probability of a quarter point cut at the September FOMC meeting.
After months of resiliency, consumer spending appears to also be slowing.
“Fitch expects annual consumer spending growth of 1.9% in 2024,” Olu Sonola, head of U.S. economic research at Fitch Ratings, said in a recent press release. “Much of the slowdown is expected to kick in during 2H24 as income growth decelerates further, the boost from pandemic savings dissipates, and higher real interest rates persist.”
Don't Miss BNDI When Adding Duration
Should inflation continue to ease and rate cuts become certain, it’s likely the investors sitting on excess cash would move back into bonds, seeking to lock in yields. For investors looking to add on duration and broad bond exposure, BNDI is a fund to consider. It consistently outperforms the broad market.
BNDI offers enhanced income opportunities in bonds. The fund invests in the iShares Core US Aggregate Bond ETF (AGG ) and the Vanguard Total Bond Market Index Fund ETF Shares (BND ). However, BNDI generated better total returns than AGG and BND since the fund’s inception in August 2022.
The income and capital gains BNDI receives from its bond exposures are enhanced by adding monthly income from the fund’s put-option strategy on the S&P 500. The strategy includes selling short puts and buying long puts to protect against volatility.
The strategy may offer positive returns in both flat and rising equity markets. It may also generate positive returns in moderately declining equity markets. This is possible if the premium earned from the puts is greater than the cost to close out the positions. BNDI may also offer a lower correlation to certain risk factors such as duration, credit, and inflation risk.
BNDI’s put options aren’t ETF options but S&P 500 index options. These options are taxed favorably as Section 1256 Contracts under IRS rules. The IRS treats options held at the end of the year as if the investor had sold on the last market day of the year at fair market value. Most importantly, the IRS taxes any capital gains as 60% long term and 40% short term. This taxation applies no matter how long the fund held the options.
This treatment can offer noteworthy tax advantages. In addition, the fund’s managers also may engage in tax-loss harvesting opportunities throughout the year on the put options.
BNDI currently has an expense ratio of 0.58%.
For more news, information, and analysis, visit the Tax Efficient Income Channel.
