XYLD - SPYI: Outperforming Both JEPI And XYLD In 2023

2023-08-14 19:12:55 ET

Summary

• Neos S&P 500(R) High Income ETF's distribution yield is 12.1% (as of 7/31/23) and pays monthly.
• By utilizing an "out of the money" covered call option strategy, the Fund's price has appreciated more year-to-date than its peers.
• The Fund leverages Section 1256 contracts and tax-loss harvesting to save investors money come tax time.

Introduction

It's been three months since publishing my initial coverage analysis on the Neos S&P 500((R)) High Income ETF ( SPYI ) - breaking down the Fund's investment objective and comparing it to the JPMorgan Equity Premium Income ETF ( JEPI ).

In this post, I want to revisit the Fund's performance year-to-date as well as compare that performance to another income-focused ETF you all had suggested in the comment section.

To remind everyone, the Neos S&P 500((R)) High Income ETF investment objective seeks to generate high monthly income in a tax efficient manner with the potential for equity appreciation in rising markets.

SPYI is an actively-managed exchange-traded fund that seeks to achieve its investment objective by investing in a portfolio of stocks that make up the S&P 500 Index (SP500) and a call option strategy, which consists of a mix of written (sold) call options and long (bought) call options on the S&P 500 Index.

Price Performance

When researching high-income ETFs to add to an income-focused portfolio, an important consideration is total performance . Specifically, what's the point of holding an ETF that generates double-digit distribution yields if the price return of the ETF declines over time?

For example, at time of writing (7/31/23), JEPI's price return year-to-date is 2.58% - compared to the S&P 500's 20.21%. Sure, JEPI paid their investors 4.91% in income year-to-date - but even after considering both their year-to-date price appreciation and their yield ( 7.18% total return ), you still would have been better off investing in the S&P 500 and simply selling your profits to supplement your income.

We see a similar story with the Global X S&P 500 Covered Call ETF ( XYLD ). This ETF's price return has been more favorable than JEPI's - coming in at 4.95% year-to-date, as well as boasting a healthy 6.05% in income paid year-to-date. However, when considering their total return of 11.63% , you still would have been better off investing in the S&P 500 and simply selling your profits to supplement your income.

What about SPYI?

SPYI's price appreciation year-to-date has been 9.13%, while paying income of 6.75% - a total return of 17.43% . This figure is substantially closer to the S&P 500's 20.57% year-to-date total return.

And after taking into account their tax-efficient strategies - ensuring more is kept in your pocket come tax time by leveraging Section 1256 contracts and tax-loss harvesting - your after-tax returns become increasingly more favorable when compared to simply selling your short-term S&P 500 profits to supplement your income.

From a pure price return perspective, SPYI has outperformed JEPI by 6.55% and XYLD by 4.18% - mainly because of the way they write their option contracts.

According to their holdings (7/31/23), the Fund is writing covered call option contracts with a strike price roughly 5% "out of the money." Compare this now to XYLD's holdings (7/31/23) - who seems to be writing covered call option contracts with a strike price "at the money."

Because of this "passively managed" option strategy, XYLD's monthly dividend payments to their investors vary greatly. This is likely because of their inability to adjust option positioning month-to-month despite market volatility or price action.

By writing covered call option contracts "out of the money," SPYI's price is able to appreciate in value in rising markets. This isn't the case for XYLD, as once the S&P 500 has appreciated beyond the strike price of their covered calls, their upside is capped at the total amount of premium generated by the option contracts.

Yields

As shared before, SPYI's annualized distribution yield (as of 7/31/23) is much higher than both JEPI and XYLD. Year-to-date, SPYI has paid $3.39 per share in the form of cash dividends to their investors - and boasts a very healthy 12.1% annual distribution yield.

Year-to-date, XYLD has paid $2.50 per share in the form of cash dividends to their investors - and boasts a 8.42% annualized distribution yield. Year-to-date, JEPI has paid $2.74 per share in the form of cash dividends to their investors - and boasts a 7.58% dividend yield. Both of these yields are quite healthy, but certainly not double-digits like SPYI's.

Conclusion

The NEOS S&P 500 High Income ETF has outperformed both the JPMorgan Equity Premium Income ETF and the Global X S&P 500 Covered Call ETF in price appreciation, income generated year-to-date, and total return. Moreover, these returns don't include the favorable tax efficiencies afforded to its investors - potentially keeping even more money in investor pockets when Uncle Sam comes knocking.

JEPI and XYLD certainly have their place in income-focused investor portfolios - but with their year-to-date total returns lagging both the S&P 500 and SPYI in a meaningful way - I begin to question " Where? "

As an income-focused investor myself, I'm surprised more investors don't know about the obvious benefits of choosing SPYI over its peers.

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