Market choppiness persists ahead of key economic data later this week. Even earnings beats prove difficult to lift equity performance as interest rate concerns weigh heavily on investors’ minds. As equity volatility continues, investors increasingly turn to equity income strategies for opportunity.
GDP data for the first quarter drops tomorrow, and core PCE (personal consumption expenditure price index) releases Friday. Core PCE is a closely watched and favored metric by the Fed when determining monetary policy.
Rising Treasury yields rates prove a challenge for equities, according to Todd Morgan, founding member and chairman of Bel Air Investment Advisors. A “negative [for equities] I have is the 10-year lifting up 70 basis points year to date, which is quite substantial,” he told CNBC. “And it needs to slow it down here, because if it breaks, for seven days, it could go to 5%.”
Such a rise would likely result in a significant drawdown in markets. In ongoing volatility and uncertainty, equity income ETFs continue to prove popular with investors, while major equity benchmark ETFs experience outflows.
The NEOS S&P 500 High Income ETF (SPYI ) recently surpassed $1 billion in AU. The fund brought in $147 million in net flows in April as of 4/23/24 according to FactSet data. It fund seeks high monthly, tax-efficient income within the S&P 500.
Meanwhile, the NEOS Nasdaq 100 High Income ETF (QQQI ) recently passed $100 million in AUM and brought in $60 million in net flows in April as of 4/23/24 according to FactSet data. The fund seeks high monthly, tax-efficient income by investing in the Nasdaq-100.
SPYI is up 4.77% on a total return basis YTD as of 4/23/24. QQQI, launched January 30, is up 2.17% on a total return basis as of 04/23/24.
Enhance Your Monthly Equity Income With NEOS
The funds employ an options strategy using covered calls to generate a premium. The premiums earned by the fund help provide a potential buffer should stocks decline. Premiums also benefit from increased volatility.
SPYI generated a distribution yield of 12.01% as of 3/31/24. QQQI generated a distribution yield of 14.28% over the same period. Distribution yield annualizes the most recent distribution and divides by the fund’s NAV at the time of distribution. It’s a forward-looking indicator for investors.
SPYI and QQQI offer layers of tax efficiency for investors seeking income. The options that QQQI uses are call options on the NDX. while SPYI uses call options on the SPX. Options for both funds qualify as section 1256 contracts and 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.
Should equities rise or fall, NEOS can actively manage 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.
QQQI and SPYI both carry an expense ratio of 0.68%.
For more news, information, and analysis, visit the Tax Efficient Income Channel.
