Markets remain volatile in an ever-changing macro narrative of U.S. rate cuts, evolving geopolitical tensions, and concerns of consumer and economic resilience. Options income strategies such as the NEOS S&P 500 High Income ETF (SPYI ) may benefit from volatility while providing core equity exposure.
The looming presidential election in the U.S. will likely create short-term volatility in markets this fall. Ongoing geopolitical tensions and risks, alongside recession concerns, conflate to create added volatility risk.
Options strategies, particularly covered call strategies, may potentially benefit from volatility. These strategies own the underlying security while writing a call on it, and they may earn higher premiums during periods of volatility. This creates the potential for higher income while also using that income to possibly mitigate some losses should the underlying assets decline.
SPYI remains popular with investors for its focus on high income within core large-cap equity exposure. Since the ETF’s launch in August 2022, it’s amassed over $1.8 billion in AUM. The fund also offers a distribution rate of 12.34% as of 07/31/2024. The distribution rate is calculated by annualizing the last distribution and dividing it by the fund’s most recent NAV at the time of distribution.
Under the Hood of Tax-Efficient, Income-Oriented SPYI
The ETF offers exposure to the S&P 500 while generating high monthly income through call options. SPYI uses money earned from written calls to buy long, out-of-the-money call options on the S&P 500 Index. An out-of-the-money call option has no intrinsic value. That’s because the underlying asset’s current price is below the call’s strike price. Should equities rise or fall, NEOS can actively manage the call options to capture gains in the underlying assets or minimize losses.
SPYI offers not only high income but also layers of tax efficiency. The fund uses index options, which are taxed favorably as Section 1256 Contracts under IRS rules. 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 as 60% long-term and 40% short-term, no matter how long investors hold them. This can offer noteworthy tax advantages.
SPYI’s managers also engage in tax-loss harvesting opportunities throughout the year on the call options, equity holdings, or both.
SPYI has an expense ratio of 0.68%.
For more news, information, and analysis, visit the Tax Efficient Income Channel.
