At NEOS Investments, we understand the importance of generating income for our investors, especially in today’s challenging environment where interest rates continue to be volatile.

Options-based ETFs from NEOS Investments seek high monthly income in a tax-efficient manner, while offering core portfolio exposure across equities, fixed income, and cash allocations.

Below, we’ll explain the difference between 30-day SEC yield, distribution rate, and dividend yield – which investors may find useful when evaluating the performance of their income and dividend ETFs. Understanding their differences can be vital for investors seeking steady income streams.

The Difference Between 30-Day SEC Yield, Distribution Rate, and Dividend Yield

Distribution Rate:

• Calculated by multiplying the most recent distribution by 12 in order to annualize it, and then dividing by the Fund’s NAV.
• Includes income from all sources, including interest, dividends, and options premiums.
• Useful for investors who want to estimate the income they will receive from an investment over the next 12 months.

30-Day SEC Yield:

• 30-day SEC yield is a standardized calculation introduced by the SEC used to measure a fund’s income earned over the past 30 days (particularly focused on fixed-income securities).
• This calculation takes into account income generated from a fund’s investments, such as interest and dividends, but does not include income received from selling options contracts.
• It’s useful for investors who want to compare the yields of different funds, particularly those holding fixed-income securities.

Dividend Yield:

• Calculated by dividing the annual dividend per share by the current share price.
• Only applicable to funds that invest in stocks and other securities that pay dividends.
• Useful for investors who want to compare the income generated by dividend-focused stocks or funds.

Seeking tax-efficiency in addition to high monthly income generation

Generating income likely has a place in most investor portfolios, and it’s valuable to understand how taxes may or may not impact your income stream.

ETFs from NEOS Investments aim to generate monthly income by selling index option contracts. It’s important to note that the treatment of index options for tax purposes can be beneficial for investors. These options are treated as Section 1256 contracts and are taxed at a blended rate of 60% long-term capital gains and 40% short-term capital gains. This can result in a lower tax rate compared to traditional income streams.

Conclusion

In summary, understanding the differences between 30-day SEC yield, distribution rate, and dividend yield can help investors better evaluate the performance of their income-focused investments. 30-day SEC yield doesn’t include income received from selling options, which is why distribution rate may provide a more comprehensive representation of the income generated by NEOS ETFs. By considering all three yield/rate calculations, investors can make informed decisions about their investments when evaluating different income-focused investment options.

Lastly, by generating income from selling options contracts and taking advantage of the tax benefits of Section 1256 contracts, options-based ETFs can offer a tax-efficient way for investors to seek income in today’s challenging environment.