Major equity indices extended their rally on Friday to close out the month, buoyed by positive earnings from mega-cap companies this week. For advisors and investors looking to earn income within equities, the NEOS S&P 500 High Income ETF (SPYI) worth considering, given recent payout returns ahead of the strong earnings season so far.
The Dow Jones Industrial Average had its second best month since January, and the S&P 500 ended the month up 1.5%, its second consecutive positive month despite concerns and volatility in the banking sector. With just over 50% of companies reporting profits so far this season and 80% of those beating analysts’ expectations, this could be a boon for stocks as recession risks continue to rise.
“The market should follow earnings,” said Gina Bolvin, president of Bolvin Wealth Management. CNBC. “It’s the mother’s milk of the market.”
Recession is looming on the horizon and in the minds of consumers and investors. For advisors looking to maximize their broad equity exposure and seek income within equities, SPYI is worth considering. SPYI is up 3.92% year-to-date and has a distribution yield of 12.19% at 03/31/2023.
SPYI is an actively managed fund launched last year and seeks to provide high income opportunities for equity portfolios, while working to preserve the income generated by its options overlay during times of market stress. . The fund seeks to fully replicate the S&P 500 Index and also uses an overlay call option strategy – call options give buyers the right to buy the underlying asset at a specific price (the price of exercise) within the period of the contract, but they are not obliged to do so.
SPYI seeks to provide higher income through call options on which the written fund earns premiums, and then can use the money earned from the written calls to buy long, out-of-the-money call options on the index S&P 500. An out-of-the-money call option has no intrinsic value because the current price of the underlying asset is lower than the strike price of the call. As stocks rise or fall, NEOS can actively manage call options to capture gains on the underlying assets or minimize losses.
The options used by the fund are not ETF options, but rather index options which are favorably taxed as Section 1256 contracts under IRS rules. This means that options held at the end of the year are treated as if they had been sold on the last trading day of the year at their fair market value and, more importantly, any capital gain or loss is taxed 60% long term. term and 40% short term, regardless of how long the options are held. This can provide significant tax advantages, and fund managers can also take advantage of opportunities to reap tax losses throughout the year on call options or equity holdings, or both.
SPYI has an expense ratio of 0.68%.
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