NEOS Investments launched its newest options-based income ETF today, this time with a focus on small-caps. The Russell 2000 High Income ETF is the fifth entry to the tax-efficient, high income ETF suite offered by the firm.
IWMI expands the popular equity-focused high income ETFs. The fund follows in the footsteps of the NEOS S&P 500 High Income ETF (SPYI ), with $1.5 billion in AUM, and the NEOS Nasdaq-100 High Income ETF (QQQI ). QQQI launched at the end of January and currently has approximately $285 million in AUM.
“IWMI is a natural extension of our growing ETF lineup that seeks to offer thoughtful portfolio building blocks fueled by data-driven options strategies,” NEOS wrote in a communication to investors.
NEOS brings a wealth of experience to options investing. The team comprises pioneers of options-based ETFs. Their current ETF suite focuses on both high income and tax efficiency across core portfolio exposures.
See also: Troy Cates Talks Growth of Options-Based Strategies
Tax Efficiency and High Income Within Small-Caps
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 a premium. 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%.
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