By: NEOS Investments
ETFs that utilize option writing strategies to generate income can be an attractive option for investors looking to enhance portfolio income or manage risk. Options-based ETFs focused on generating reliable income for investors may also provide the added benefit of return of capital distributions. While some investors may view return of capital as a negative, there are several reasons why it can be beneficial, especially from a tax perspective.
Return of capital is a distribution made by an ETF to its investors that is classified as a return of the investor's original investment. Unlike dividends or interest income, return of capital is not considered income, and is not immediately taxable. Instead, it reduces the investor's cost basis in the ETF, which can potentially reduce the amount of capital gains tax owed when the investor sells their shares. Return of capital can be particularly useful for ETFs that use option writing strategies to generate income.
Options-based income ETFs from NEOS aim to harness the benefits of return of capital for investors without eroding their underlying principle. Each ETF seeks to fund a portion of its monthly income distributions from sold index option premium, which is converted to capital gains, and then paid out to investors on a monthly basis.
The goal is to maintain or grow each fund’s net asset value (NAV) over time, while paying out a reliable and tax-efficient monthly income distribution. Additionally, within the ETF structure, portfolio losses can be carried forward at opportune times to offset gains in a fund’s option portfolio, helping to potentially offer a high monthly yield with minimal tax liabilities.
While “return of capital” can sound like a negative characteristic, it can be a valuable component of ETFs that use option writing strategies, particularly from a tax perspective. As with any investment, investors should carefully consider the risks and benefits before making any investment decisions.
Seeking Tax-Efficient Monthly Income? NEOS ETFs aim to deliver the next evolution of options strategies, where seeking income is the outcome.