The current market landscape is anything but predictable. We’re facing a whirlwind of economic challenges, from underwhelming earnings reports to inflation and geopolitical uncertainties. This volatility makes it even more crucial for investors to seek out reliable income streams. One strategy that has gained traction in recent years is the use of covered call ETFs.
While many ETFs have entered this space, not all are created equal. It’s essential for investors to carefully evaluate these ETFs before adding them to their portfolios. For instance, the widely popular JPMorgan Equity Premium Income ETF (JEPI) does not invest in the S&P 500, despite its name. Instead, its fund managers select a portfolio of stocks that they believe offer attractive risk/reward characteristics.
This raises an important point: Before investing in any covered call ETF, ensure that it aligns with your expectations and investment goals. It’s crucial to understand how the ETF generates income and whether it truly invests in the underlying index it claims to benchmark against.
One ETF that has gained my attention is the NEOS S&P 500 High Income ETF (SPYI). This ETF distinguishes itself by directly investing in all 500 constituents of the S&P 500 Index. This means that as the S&P 500 adds or removes companies from its roster, investors in SPYI automatically gain or lose exposure to those names.
The ETF’s strategy involves writing out-of-the-money call options on the S&P 500. This means that investors receive premium income from selling these options while potentially benefiting from some upside price appreciation if the index rises. SPYI’s fund managers roll these options forward every month, resulting in consistent monthly distributions for investors.
Here’s where SPYI truly shines: The monthly distribution paid to investors is, for the most part, classified by the IRS as a return of capital. This means it’s not taxable during the same calendar year it’s received. This tax efficiency sets SPYI apart from ETFs like JEPI, whose distributions are taxed as ordinary income.
SPYI’s performance has been impressive since its launch in August 2022. It delivered a total return of 18.4% in 2023, outperforming JEPI’s 9.8% return. SPYI continues to impress in 2024, with a total return of 14.0% as of September 4, 2024, compared to JEPI’s 10.0% return. This performance difference can be attributed to SPYI’s full investment in the S&P 500, allowing investors to capture the recent market upside.
Beyond its performance, SPYI offers a key advantage: Predictability. Since its inception, it has consistently paid investors a 1% monthly distribution. This reliability makes it a valuable addition to any income-focused portfolio, especially during times of market volatility. In contrast, JEPI’s monthly distribution has experienced significant fluctuations, creating uncertainty for investors.
In conclusion, SPYI stands out as a reliable and tax-efficient income generator for investors seeking exposure to the S&P 500. Its consistent monthly distributions, coupled with its strong performance and tax efficiency, make it a compelling option in today’s unpredictable market environment.
