Small-cap stocks appear favorably positioned in a declining rate and soft landing environment. For advisors and investors wanting to harness the potential in small-caps looking ahead, the NEOS Russell 2000 High Income ETF (IWMI ) is worth consideration.
Markets rose in trading Wednesday, with several asset classes climbing significantly. Small-cap stocks made significant gains, with the Russell 2000 Index up over 4% post-election, reported Investopedia. Small businesses carry high interest rate sensitivity and benefit from a declining rate environment. Markets currently expect another quarter point rate cut at tomorrow’s Fed meeting, according to the CME FedWatch Tool.
The NEOS Russell 2000 High Income ETF (IWMI ) seeks to combine high monthly income within small-cap stocks 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. Such strategies benefit from elevated market volatility, earning higher premiums when volatility spikes.
IWMI currently offers a distribution rate of 14.83% as of 10/31/24. Distribution rate annualizes the most recent distribution and then divides it by the fund’s NAV.
The actively managed IWMI 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 a net expense ratio of 0.68% on a contract that lasts through 08/28/25.
For more news, information, and analysis, visit the Tax Efficient Income Channel.
