30-day SEC yield, distribution rate, and dividend yield – What to make of them?

By: NEOS Investments

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.

Related Topics:

NEOS ETF Lineup Overview

Seeking Tax-Efficient Monthly Income? NEOS ETFs aim to deliver the next evolution of options strategies, where seeking income is the outcome.

Understanding "Return of Capital"

Aiming to Maximize Returns and Minimize Taxes: The Potential Benefits of Return of Capital Distributions in Option-Writing ETFs

Investors should carefully consider the investment objectives, risks, charges and expenses of Exchange Traded Funds (ETFs) before investing. To obtain an ETF's prospectus containing this and other important information, please call (866) 498-5677 or view/download a prospectus here: SPYI | QQQI | IWMI | BNDI | CSHI. Please read the prospectus carefully before you invest.

An investment in NEOS ETFs involve risk, including possible loss of principal. The equity securities purchased by the Funds may involve large price swings and potential for loss. There is no gaurantee the NEOS ETFs will make monthly distributions and the amounts may fluctuate from month to month. Distributions made by NEOS ETFs have been classified as a return of capital and may be comprised of option premiums, dividends, capital gains, and interest payments. To view both current and historical monthly estimates of ETF distribution composition, investors may view the 19a-1 notices available on each corresponding Fund's webpage.

The use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. These risks include (i) the risk that the counterparty to a derivative transaction may not fulfill its contractual obligations; (ii) risk of mispricing or improper valuation; and (iii) the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Derivative prices are highly volatile and may fluctuate substantially during a short period of time. The use of leverage by the Fund, such as borrowing money to purchase securities or the use of options, will cause the Fund to incur additional expenses and magnify the Fund’s gains or losses. The earnings and prospects of small and medium sized companies are more volatile than larger companies and may experience higher failure rates than larger companies. Small and medium sized companies normally have a lower trading volume than larger companies, which may tend to make their market price fall more disproportionately than larger companies in response to selling pressures and may have limited markets, product lines, or financial resources and lack management experience. The funds are new with a limited operating history.

Investments in smaller companies typically exhibit higher volatility. Investors in NEOS ETFs should be willing to accept a high degree of volatility in the price of the fund’s shares and the possibility of significant losses.

All references to tax matters are provided for informational purposes only and should not be considered tax advice and cannot be used for the purpose of avoiding tax penalties.Â Investors seeking tax advice should consult an independent tax advisor.

The information on this website does not constitute investment advice or a recommendation of any products, strategies, or services. Investors should consult with a financial professional regarding their individual circumstances before making investment decisions. NEOS Funds or its affiliates, nor Foreside Fund Services, LLC, or its affiliates accept any responsibility for loss arising from the use of the information contained herein.

NEOS ETFs are distributed by Foreside Fund Services, LLC.

Definitions:

Option: Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date.

Distribution Rate: The annual rate an investor would receive if the most recent fund distribution remained the same going forward. The distribution rate represents a single distribution from the Fund and is not a representation of the Fund's total return. The distribution rate is calculated by multiplying the most recent distribution by 12 in order to annualize it, and then dividing by the Fund's NAV.

30-day SEC Yield: A calculation based on a formula mandated by the Securities and Exchange Commission (SEC) that calculates a fund's hypothetical annualized income, as a percentage of its assets. A security's income, for the purposes of this calculation, is based on the current market yield to maturity (in the case of bonds) or projected dividend yield (for stocks) of the fund's holdings over a trailing 30-day period. This hypothetical income will differ (at times, significantly) from the fund's actual experience; as a result, income distributions from the fund may be higher or lower than implied by the SEC yield.

Tax Loss Harvesting: The timely selling of securities at a loss in order to offset the amount of capital gains tax due on the sale of other securities at a profit.