The S&P 500 is a lot of things. In ETF form, that index represents an efficient, often cost-effective avenue for investors looking to tap into a trusted gauge of the largest U.S.-based companies.
One thing the S&P 500 is not is a haven for income seekers. Consider this: All three of the largest ETFs tracking the cap-weighted version of the S&P 500 yield barely more than 1.1%. That’s not much to write home about in the dividend department. And that income situation may not improve materially anytime soon with more companies embracing share buybacks over dividends. But there are ways for investors to up the S&P 500 income proposition.
Enter the NEOS S&P 500 High Income ETF (SPYI ). A marquee ETF in the NEOS suite, it’s just a few months removed from its third birthday. And it’s already flirting with $6 billion in assets under management. That’s a testament to advisors and investors embracing SPYI’s distribution rate that’s nearly 12x what’s found on a basic S&P 500 ETF.
SPYI Has Favorable Story to Tell
Investors who have some experience with options income ETFs may look at SPYI and think they’re in familiar territory. To some extent, they are. But SPYI’s details are important. They hold clues as to why this fund may be a better mousetrap than competing products.
“The Fund utilizes a call option strategy that may include both sold and purchased SPX index options, which may provide the opportunity for upside capture in rising equity markets,” according to NEOS.
Said another way, SPYI isn’t solely a covered call ETF. Some buying of call options is involved. So SPYI may deliver more upside than a rival ETF that simply sells SPX calls. The difference in methodology leads to significant differences in returns.
Consider this: For the year ending November 10, the largest basic S&P 500 ETF returned 16.8% while one of the oldest and largest covered call ETFs following the index gained 8.3%. During that period, SPYI trounced its rival, returning 14.7%.
Critics might say SPYI lagged the standard S&P 500 by 210 basis points over that period. Indeed, that cannot be contested. But if that’s a point of emphasis, it should also be noted that SPYI’s annualized volatility during that stretch was 210 basis points less than that of the basic SPX ETF. In other words, SPYI’s risk-adjusted returns stacked up pretty well with an old-guard SPX index fund.
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