Market volatility and uncertainty are expected to persist at least into the first half of 2023 with Federal Reserve rate hikes looming and a continued economic slowdown. In such a difficult environment, income-seeking funds have become a top priority for many advisors and Troy Cates, co-founder and managing partner of NEOS recently appeared on Prime ETFs with Nate Geraci to talk about their range of options-based income ETFs and whether to invest in options this year.
NEOS offers a range of option-based ETFs on different asset classes: NEOS S&P 500 High Income ETF (SPYI) within the actions, the NEOS Enhanced Income Aggregate Bond ETF (BNDI) in the bonds, and the NEOS Enhanced Income Cash Alternative ETF (CSHI) within 1 to 3 months Treasury bills. All funds use a data-driven options strategy that is actively managed as well as options on the SPX index that are ranked as 1256 contracts with lower tax rates of 60/40.
“My team and I have been involved in the options-based ETF space for a number of years,” Cates explained. “We’ve just seen the space continue to grow, many more vendors have entered the space – new vendors. Many existing providers were expanding their suite and we just wanted to highlight what we believe will be the next evolution of options and income based ETFs in the space.
Investing with options comes with a level of complexity that can be challenging even for seasoned investors and so options investing education has been one of the keys to unlocking growth in the space. Understanding how options roll over, when they roll over, how they are taxed, and what specific functions they serve as part of a strategy enables advisors to confidently communicate with clients.
“I think advisors really dig and dig deep into the weeds so they can explain to their clients why they own a specific ETF,” Cates said.
About NEOS Income ETFs
the NEOS S&P 500 High Income ETF (SPYI) launched in August 2022 and uses a full S&P 500 replication strategy. On top of that are laddered covered call options on the S&P 500 index. Index options offer better tax opportunities as well as liquidity, explained Cates. It is a systematic rules-based ETF that uses a model to determine if and when covered calls should be sold, how much of the portfolio’s notional value should be sold, or even if a long call should be added. to create a call gap. . The options reset monthly and the fund targets a 10-12% annualized distribution yield that pays monthly.
“How does it work in bull and bear markets? On the upside our underlying data is the same but we have these covered calls – we may not participate as much on the upside but on the downside these months flat to low in the S&P 500 we could make a bit better because we brought in some of that premium comes from covered call,” Cates said.
the NEOS Enhanced Income Aggregate Bond ETF (BNDI) and the NEOS Enhanced Income Cash Alternative ETF (CSHI) also launched in August 2022 and both use a similar strategy that sells put options. BNDI has long been the Vanguard Total Bond Market ETF (BND) and the iShares Core US Aggregate Bond ETF (AGG) then sells out-of-the-money SPX sell spreads weekly to account for market volatility.
“Our goal here was to bring 200 to 250 basis points of income over what AGG was giving you right now in your portfolio,” Cates explained.
CSHI is long on 3 month treasuries and also sells SPX index sell spreads out of the money rolling every week but sell spreads that are even more out of the money than BNDI to maintain a more conservative approach. The ETF is looking to offer 100-150 basis points above what 3-month Treasury bills are offering.
“When we created this product, treasury bills weren’t paying anything, so we were like ‘how can you give someone looking for a cash alternative 100 to 150 basis points?’ Now that Treasuries are yielding 4% or more, it’s a really attractive product,” Cates said.
Looking ahead to this year, Cates believes that “we will continue to see a lot of volatility as we have seen over the past year as the Fed is still battling inflation, but we are looking at NEOS only with this increase in volatility comes opportunity in the options market.
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