The recently launched NEOS Russell 2000 High Income ETF (IWMI ) just crossed its first full month of trading. The fund logged a distribution yield of 14.03% in July, making it an attractive entrant into the small-cap and income space.
The fund utilizes a similar strategy to that employed by the NEOS S&P 500 High Income ETF (SPYI ), with over $1.6 billion in AUM, and the NEOS Nasdaq-100 High Income ETF (QQQI ). Both funds also offer notable distribution yields of 12.34% and 14.96% respectively as of 07/31/2024. Distribution yield is calculated by annualizing the last distribution and dividing it by the fund’s most recent NAV at the time of distribution.
IWMI Combines Upside Capture and Tax-Efficient Benefits
IWMI seeks to combine high monthly income within small caps 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.
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.
Since the fund’s inception on 06/25/2024, IWMI’s NAV rose 6.56% compared to the Russell 2000 Total Return Index’s 11.14%. This translates to approximately 60% upside capture rate for the fund as of the end of July.
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%.
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