This structure gives this ETF two key tax advantages. First, SPX index options fall under Section 1256 of the tax code, meaning that gains are taxed on a 60/40 split -- 60% long term, 40% short term -- regardless of the holding period, often resulting in a lower effective tax rate.
Second, because of how the fund manages its options and capital gains, a significant portion of its 12.04% distribution yield is classified as return of capital, which is tax-efficient since it reduces your cost basis instead of generating immediate taxable income.
While it carries a slightly higher 0.68% expense ratio, the fund's performance since its August 2022 inception has been strong. It delivered a 14.72% annualized return, outpacing the CBOE S&P 500 BuyWrite Monthly index, which returned 11.43% over the same period.
This ETF may appeal to investors who are looking for tax-smart high income without giving up entirely on growth potential, as well as those who are comfortable with a newer fund.
6. NEOS Nasdaq-100 High Income ETF
This covered call ETF passively holds stocks from the Nasdaq-100, allowing for tax-loss-harvesting opportunities, while actively managing an options overlay using NDX index options, which, like SPX, are Section 1256 contracts. Given the Nasdaq-100's higher volatility, the NEOS Nasdaq-100 High Income ETF (QQQI -1.73%) can generate larger option premiums, which explains its elevated 14.11% distribution rate.
