In an ever-broadening field of options-based ETFs, the NEOS S&P 500 High Income ETF (SPYI) remains a top contender. The fund recently crossed over $3 billion in AUM and touts a distribution rate of 12%, as of the end of January.

Options-based strategies continue to gain traction with advisors and investors for their income, hedging, and/or diversification potential. Investors wanting to diversify their S&P 500 holdings or seeking to optimize income within large-caps would do well to consider SPYI. The fund offers exposure to the S&P 500, while generating high monthly income through call options.

“NEOS has quickly become known in the ETF industry for their options expertise,” said Todd Rosenbluth, head of research at VettaFi. “It is great to see SPYI reach another milestone.”

Since inception in August 2022, SPYI is up 42.68% on a total returns basis, as of February 20, 2025. It also offers a distribution rate of 12.01%, as of January 31, 2025. Distribution rate annualizes the most recent distribution and then divides by the fund’s NAV. It’s a more forward-looking estimate of income earned if the most recent distribution remained the same for a year.

Equity Exposure With Tax-Efficient Options Income

The fund invests in the the S&P 500 and uses money earned from written calls to buy long, out-of-the-money call options on the S&P 500 Index. An out-of-the-money call option has no intrinsic value. That’s because the underlying asset’s current price is below the call’s strike price. Should equities rise or fall, NEOS can actively manage the call options to capture gains in the underlying assets or minimize losses. Heightened volatility often benefits call-writing strategies, as they earn higher premiums in volatile environments.

SPYI combines high income with layers of tax efficiency. The fund uses index options, which are taxed favorably as Section 1256 Contracts under IRS rules. Options held at year’s end are treated as if sold at fair market value on the last market day. Any capital gains or losses are taxed as 60% long-term and 40% short-term, no matter how long investors hold them. This can offer noteworthy tax advantages.

A portion of distributions may also qualify as return on capital (ROC). ROC distributions occur when some, or all, of an initial investment is returned. Some options strategies generate ROC as a return on the premiums earned instead of returning principal.

SPYI’s managers also engage in tax-loss harvesting opportunities throughout the year on the call options, equity holdings, or both.

SPYI has an expense ratio of 0.68%.

For more news, information, and analysis, visit the Tax-Efficient Income Channel.