June’s cooling CPI print resulted in a snapback for small cap stocks while large-cap tech indexes fell Thursday. Investors looking to capture the rebound potential of small-caps in a declining rate environment would do well to consider the NEOS Russell 2000 High Income ETF (IWMI ).
Small-cap stocks remained under pressure for much of the last two years in a high-rate environment. These companies often have more direct exposure to interest rates with their heavier reliance on new loans than large-cap peers. The pendulum swings both ways however, with small-caps offering outsized rebound potential in a declining rate environment.
June’s CPI print revealed an inflationary drop of 0.1% month-over-month, the first decline in nearly two years. Prices rose 3% year-over-year on forecasts of 3.1%. Softening inflation lends credence to the potential for a rate cut this fall. Markets currently price in an 88% likelihood of a quarter point cut at the September meeting according to futures via the FedWatch Tool from CME Group.
The Russell 2000 Index closed up approximately 3.6% on Thursday while the Nasdaq-100 fell over 2% according to Y-charts data. The rebound could be a potential preview of small-cap performance should interest rate cutting begin this fall.
Invest in Small-Caps While Optimizing for Income With IWMI
The recently launched NEOS Russell 2000 High Income ETF (IWMI ) is a fund to consider for investors looking to add small-cap exposure. The fund seeks to combine high monthly income within small-caps with layers of tax-efficiency. Investors wishing to know more about the strategy or the NEOS tax-efficient income ETF suite can register for the webcast on Tuesday, July 16 at 2pm ET, hosted on the VettaFi platform.
IWMI 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. Covered calls entail buying an asset while also writing a call on the underlying asset.
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.
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.
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.
IWMI has an expense ratio of 0.68%.
For more news, information, and analysis, visit the Tax Efficient Income Channel.
