Looking ahead to next year, a number of potential tailwinds exist for mid- and small-cap stocks. The NEOS Russell 2000 High Income ETF (IWMI ) is worth consideration for the tax-efficient, high income it’s brought to portfolios since the fund launch earlier this year.
Megacap tech stocks dominated markets for much of the year, driving broad equity performance. The trend may continue into next year but investors increasingly look to the performance potential in small caps in an environment of declining rates and new economic policies.
Combine Tax-Efficient Income and Small-Cap Investing
Launched at the end of June, the NEOS Russell 2000 High Income ETF (IWMI ) continues to attract investors headed into the final month of the year. The fund has net assets of $114 million as of November 21, 2024, not surprising given its performance since inception. The fund’s total returns were 12.94% as of November 21, 2024, according to Y-charts data.
IWMI currently boasts a distribution rate of 14.83%, as of October 31, 2024. Distribution rate annualizes the most recent distribution before dividing by the fund’s NAV at the time of distribution. It 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.
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 August 28, 2025.
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