Market volatility and uncertainty could persist through at least the first half of 2023 as the Federal Reserve rate hike looms and the economy continues to slow. In such an ongoing difficult environment, income-seeking funds have become a top priority for many advisors, with the recent emergence of NEOS co-founder and managing his partner Troy Cates. ETF Prime Join Nate Jerash to discuss the options-based Income ETF lineup and opportunities for options-based investing this year.
NEOS offers a variety of option-based ETFs across various asset classes. NEOS S&P 500 High Income ETF (SPYI) In stock, NEOS Enhanced Income Aggregate Bond ETF (BNDI) in bonds, and NEOS Enhanced Income Cash Alternative ETF (CSHI) Within 1-3 months Treasury bill. All funds utilize an actively managed, data-driven options strategy and SPX index options classified as 1256 contracts with a low 60/40 tax rate.
“My team and I have been in the options-based ETF space for years,” Cates explained. “We just saw the space continue to grow, and many other providers – new providers – were entering the space. We just wanted to bring out what we think is the next evolution of ETFs and income in that space.”
Investing with options involves a level of complexity that is daunting even for experienced investors, so education in options investing is one of the keys to unlocking growth in this space. By understanding how options roll over, when they roll over, how they are taxed, and the specific function the option is performing within a strategy, advisors can confidently can communicate.
“I think advisors really dig and dig down the weeds in being able to explain to clients why they own a particular ETF,” Cates said.
About NEOS Income ETF
of NEOS S&P 500 High Income ETF (SPYI) It will launch in August 2022 and utilizes the full replication strategy of the S&P 500. On top of that, the S&P 500 Index covered call option is added. Index options offer better taxation opportunities and liquidity, Cates explained. It uses models to determine if and when to sell covered calls, how much of the portfolio’s notional amount to sell, or the need to add long calls to create a call spread. An ETF based on systematic rules that determine whether there is Options reset monthly and the fund seeks an annualized dividend yield of 10-12% paid monthly.
“How does it work in an up market and a down market? On the up side, the underlying data is the same, but you have these covered calls. You get it,” Cates said.
of NEOS Enhanced Income Aggregate Bond ETF (BNDI) and the NEOS Enhanced Income Cash Alternative ETF (CSHI) Also launched in August 2022, both utilize a similar strategy of selling put options. BNDI is long Vanguard Total Bond Market ETF (BND) and the iShares Core US Aggregate Bond ETF (AGG) Then sell out-of-the-money SPX puts and set spreads weekly to account for market volatility.
“Our goal here was to bring in 200 to 250 basis points more income than what AGG currently offers in its portfolio,” Cates explained.
CSHI is 3-month Treasury long and also sells out-of-the-money SPX index put spreads, but maintains a more conservative approach with put spreads more out-of-the-money than BNDI . The ETF aims to outperform what a 3-month Treasury offers by 100-150 basis points.
“When we created this product, Treasuries weren’t producing anything, so we were thinking, ‘How can we give people looking for an alternative to cash 100 to 150 basis points? Now that the T-bill yields over 4%, it’s a very attractive product,” said Cates.
Looking ahead to this year, Cates believes: in the options market. ”
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