In times of uncertainty, investors will typically gravitate to simplicity, but lately, they’ve been running towards complexity. Options-based strategies, for example, have been seeing greater demand amid the market volatility. This is perfectly positioned for discussion during TMX VettaFi’s Q2 Market Outlook Symposium. Moderated by TMX VettaFi Head of Research Todd Rosenbluth, the topic of options-based ETFs was covered with Garrett Paolella, co-founder and managing partner of NEOS Investments.
Palolella explored the drivers behind the growth of these ETFs. Additionally, he spoke on the critical role of what he expertly calls an “options practitioner.”
Beyond Income and Due Diligence
Paolella emphasized the surge in demand for options-based ETFs, mentioning that over 800 products are now vying for investor attention. What was once a niche corner of the market focused on diversifying income amid low interest rates has evolved. It is now a sophisticated toolkit that’s conducive to modern portfolio construction.
Generating reliable income is till a staple of the category. However, given today’s macroeconomic backdrop, investors have become more focused on managing market volatility and downside risk. Paolella identified that these products are no longer just “add-ons” to a core portfolio, but essential components.
Advisors can amplify their specific market views with NEOS ETFs—whether that is capturing tech upside through NEOS Nasdaq 100 High Income ETF (QQQI ) or harvesting small-cap volatility via NEOS Russell 2000 High Income ETF (IWMI ). Other ETFs to note from NEOS include the NEOS S&P 500 High Income ETF (SPYI ) and the NEOS MSCI EAFE High Income ETF (NIHI). The level of exposure these options-based ETFs provide a robust layer of flexibility that plain-vanilla equities ETFs can’t.
Paolella noted that due diligence is also important amid this greater demand for options-based strategies.. He warned that not all strategies are created equal. Issuers may utilize “static” portfolios designed by index providers and subbed out to third-party traders.
“At the end of the day, you have a portfolio that is probably not built by an options practitioner who’s been spending their career on it,” Paolella cautioned, urging advisors to avoid the yield trap when assessing products and to understand what they’re looking at: underlying exposures, credit duration, and interest rate sensitivities.
The NEOS Difference
Save for those who filed extensions, tax time is now behind us. However, it’s never too early or too late to start prepping for the 2026 tax year filing. That said, one of the more compelling aspects of the NEOS approach is a targeted focus on net after-tax returns. As Paolella noted, high-income products may be notoriously tax-inefficient. However, NEOS utilizes specific structural advantages to mitigate this burden via the following strategies:
- Section 1256 Contracts: By using index options, NEOS products take advantage of a tax rule where 60% of gains are taxed at long-term rates and 40% are taxed at short-term rates irrespective of holding period.
- Active tax-loss harvesting: Because the aforementioned NEOS funds are actively managed, they can embed tax-loss harvesting strategies into their roll process. When market conditions are suitable, they generate losses against gains that can convert distributions into return of capital (ROC). This ROC tax treatment lowers an investor’s cost basis, which essentially defers tax liabilities and converts ordinary income into long-term capital gains when the fund is sold.
Given their explosion in popularity, the options-based market is suddenly a crowded room. However, Paolella’s message regarding NEOS and how they differentiate themselves is clear: their experience in navigating tax and market cycles separates them from the field.
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