SPYI: Proving That You Can Get The Best Of Both Worlds

seekingalpha08-25

Neos S&P 500 High Income ETF (SPYI) offers high monthly income and potential for capital appreciation through a unique option strategy.SPYI offers a dividend yield of about 11.7% and distributions are...

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href=https://seekingalpha.com/article/4716958-spyi-proving-that-you-can-get-the-best-of-both-worlds><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Neos S&P 500 High Income ETF (SPYI) offers high monthly income and potential for capital appreciation through a unique option strategy.SPYI offers a dividend yield of about 11.7% and distributions are...</p>\n\n<a href=\"https://seekingalpha.com/article/4716958-spyi-proving-that-you-can-get-the-best-of-both-worlds\">Source 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NAV growth and similar price movements.SPYI's OTM option strategy sets it apart from other covered call ETFs, providing a smoother long-term investing experience.   Colin Anderson Productions pty ltd/DigitalVision via Getty Images Overview There have been an abundance of covered all funds that have launched over the last couple of years and makes it such an attractive time to be an income investor. Income investors typically find themselves making the trade off with receiving a high distribution in exchange for very little to no capital appreciation. However, Neos S&P 500 High Income ETF (BATS:SPYI) changes this and makes it possible to get the best of both worlds. I previously covered SPYI earlier in the year and since then the total return has impressed. Looking back on a YTD basis, the total return of SPYI sits above 14% and while it still underperforms the S&P (SPY), I am very happy that this covered call ETF is holding its own weight. Data by YCharts SPYI operates with the main objective of generating high monthly income through an option strategy driven by its exposure to holdings that make up the S&P 500 Index. The fund also aims to do this is a tax efficient manner where the options are made up of 60% long term and 40% short term contracts. The strategy that it implements aligns with my personal favorite because it allows for upside price appreciation to be captured from the movement of the underlying holdings. This makes a world of a difference when compared to its covered call ETF counterparts that use the opposite strategy, which I will circle back to shortly. I've been impressed with how SPYI has maintained its NAV so far. There are a growing amount of covered call ETFs that deteriorate their net asset value through a flawed option strategy and issuing distributions that are ridiculously large. SPYI offers a dividend yield of 11.7%, which sits closer to the yields offered by other asset classes such as closed end funds, master limited partnerships, or business development companies just to name a few. The last time I covered SPYI I discussed how the monthly distributions make it an attractive option for retired investors looking for a source of reliable income. This time around I wanted to touch on why the fund has proven itself to be a viable long term holding and how the recent market volatility serve as a good test to the fund's stability. The fund is still relatively new with an inception dating back to late 2022. The fund maintains an underlying exposure tot he S&P 500 index while offering a reasonable 0.68% expense ratio that is well offset by the current dividend yield. The fund has now grown to have assets under management totaling $1.83B. Holding Its Weight At the very end of July, we experienced a sharp market drop across all sectors that was in response to Japan raising their interest rates for the first time since 2007. Markets sharply dropped and opened August in the red and SPYI was no exception to this. However, since the underlying holdings within are a mirrored version of the S&P constituents, the price momentum quickly shifted and tracked similar to the S&P 500 during the recovery the same week. Below we can see how the price pattern remains similar in nature with SPYI sharing the same price spikes and drips as SPY. Data by YCharts While the price gains undercut that of SPY as expected, I like the fact that SPYI remains diverse across many different holdings. According to the most recent data, SPYI maintains approximately 500 different individual holdings. This eliminates any single stock risk, similar to what we'd see in alternative funds such as the Yieldmax COIN Option Income Strategy ETF (CONY). Apple currently remains the largest holding, making up 7% of the total weight. This is followed by sizeable positions in both Nvidia (NVDA) and Microsoft (MSFT), accounting for 6.8% and 6.62% respectively. As we can see, the top holdings are mostly comprised of technology exposure similar to the S&P index.   Neos Funds However, tech exposure only makes up a third of the fund's total weight at the moment. SPYI still maintains exposure to mixed group of industries such as financials, health care, consumers, and energy for example. This mixed exposure helps SPYI maintain a healthy price movement without any deterioration. In fact, the fund's NAV has grown by nearly 30% since the inception. This NAV growth can be attributed to the ideal option strategy that's implemented in combination with the diverse set of underlying equities within. Data by YCharts Ideal Strategy When I say 'ideal', I am referring to the fact that SPYI implements an OTM (out of the money) option strategy in addition to an ATM (at the money) option strategy. This strategy has historically proven to be more efficient in capturing price appreciation. While this strategy still technically caps the upside price movement, it simultaneously allows for price gains to be experienced at a greater capacity. I read through the latest prospectus and found some helpful nuggets of information that helped clearly lay out how the options operate. There are two different layers that help SPYI achieve success and it is one of the few fund's that I have come across to approach options this way. (i) written (sold) call options on the S&P 500® on up to 100% of the value of the equity securities held by the Fund to generate premium from such options, and (ii) using a portion of the premium received to buy out-of-the-money call options on the same Reference Index to provide the potential for upside equity participation when the underlying index appreciates. The Fund expects the total value of the written call options and the total value of the purchase call options to each be up to 100% of the Fund’s net assets. In an effort to make this a bit easier to understand, let me try to paint a visual to break it down. The first portion of this process involves SPYI writing call options ATM. Let's imagine that SPYI writes an option with a strike price of $102 on an underlying equity price at $100. As a reward for the option, the fund receives a $2 premium regardless of whether or not the underlying equity's price stays flat, falls below, or rises above the strike price of $102. The most ideal situation would be for the underlying equity's price to rise above the strike price of $102 so that the premium can be collected and the fund can experience some price upside. If the underlying equity's price falls below the initial $100, SPYI still collects the premium and gets to keep the underlying equity. In this case, the premium received can actually soften the impact of the underlying price decline of the equity. The second part of this process includes SPYI now using that same premium to purchase separate OTM option contracts that may have a higher strike price that allows for greater price appreciation. Therefore, instead of a strike price of $102, SPYI may purchase an OTM option contract with a strike price of $110 for the same underlying equity priced at $100. This would allows for SPYI to capture more of the price upside on the underlying equity. Since SPYI maintains the same constituents that make up the S&P index, SPYI can be a great long term market if you believe in the future success of these large cap US based businesses. Comparison: Smoother Experience This use of OTM option strategies and a diverse set of underling holdings helps SPYI provide a much smoother long term experience compared to its ATM-based covered call ETF peers. Some funds that implement an ATM strategy that come to mind are the following:  Defiance S&P 500 Enhanced Options Income ETF (JEPY) Defiance Nasdaq 100 Enhanced Options Income ETF (QQQY) Global X Russell 2000 Covered Call ETF (RYLD)  While each of these funds may have their own differences in strategy and underlying holding exposure, these all maintain a focus on an ATM option strategy. We can see that SPYI has undoubtedly held up the best in comparison to these alternatives. SPYI has still managed to show a bit of price appreciation while we have QQQY being down a massive 33% since September of last year. Data by YCharts SPYI lacks the high adrenaline appeal that some of these other funds may have. SPYI sports a dividend yield of 11.7% and issues distributions on a monthly basis. The most recently announced monthly dividend is $0.5564 per share and lacks the same weight as some of these peers. What SPYI does have to its benefit however, is the fact that SPYI's history of monthly distributions have remains ultra consistent and stable with a shortage of large decreases. Since the fund's inception the distributions have remained within the same range and can make for a smoother investing experience all around. This is especially true for the older investors that may depend on a consistent rate of income to help supplement their retirement income.   Seeking Alpha For reference, JEPY current sports a massive high distribution yield of approximately 45%. Similarly, RYLD currently has a dividend yield of 12.25% which is only slight higher than SPYI but can be more enticing for an income hungry investor. Lastly, QQQY sports a dividend yield that is massive at nearly 70%. These distributions are a bit deceptive when you combine the price deterioration to get the total return amounts. We can see that the total returns are nearly the same and SPYI lands pretty on par with these alternatives. Data by YCharts However, the most important part of this is that SPYI provides a similar total return without the principal erosion over time. While it's true that you could offset some of this erosion by reinvesting these distributions back into their respective funds, that sort of defeats the purpose for some investors that would like to reallocate or spend these distributions. Reinvesting portions of your distributions is totally acceptable but it doesn't sit right with me when you are absolutely required to do so just to offset the impact of a continually decreasing share price. Since SPYI maintains a unique usage and strategy of its option strategy, I anticipate it to outperform these alternatives funds over longer periods of time. Not only that, but it also offers an overall smoother experience that doesn't cause high levels of stress from seeing a position deep in the red over time. Downside It should be understood that SPYI is best utilized as an income investment. As such, SPYI will likely always underperform traditional S&P focused ETFs over longer periods of time. Just as an example, refer to the table below that proves all basic index funds like this will likely outperform SPYI. Despite the OTM option strategy implemented, the price upside is still capped and therefore SPYI will always underperform. I mention this because if you are an investor that only wants to maximize your total return, you'd certainly be better off with one of these traditional alternatives. Data by YCharts In addition, the fund states that it aims to deliver tax efficient distributions. While it may be more efficient than other high yielding asset classes like closed end funds or REITs, there still may be a higher tax burden from the distributions due tax time. This is because small portions of the distribution are funded from the fund's net investment income. I was able to locate the latest section 19 notice which reveals that most of the distribution is classified as return of capital. However, there is a small 5% portion of the distribution that will be funded from net investment income. While attractive, this breakdown may still result in a higher tax drag compared to qualified dividends.   SPYI 19a Notice Takeaway  As a result, I maintain my buy rating on SPYI as the strategic option approach allows for both high levels of income and some capital appreciation. I like the fact that this covered call ETF maintains a diverse set of holdings that is similar to the S&P 500. The price stability has held up quite well since inception and has proved that its strategy is efficient. This makes SPYI one of the most attractive covered call ETFs as it has been able to avoid a deteriorating share price similar to alternative funds that implement ATM option strategies. While the dividend yield may not be as high as some of the other funds out there, it offers the price stability which makes for a much less stressful investing experience and stands out as one of the only viable long term options in this category of investments.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2462585679"}