Why This High-Yield, 12% Dividend ETF Is a Must-Own Stock

Why buy a basic index fund when you can strive for market-beating returns? Anything is possible with actively managed exchange traded funds (ETFs), and today’s investors may tap into Street-beating strategies with the NEOS S&P 500 High Income ETF (BATS:SPYI). 

You’ll find that SPYI is a top-yielding ETF, but don’t just buy the fund for its yield. Dive in deeper and check out the NEOS S&P 500 High Income ETF’s potential for share-price growth as well as its tax structure. When all is said and done, the SPYI ETF’s advantages will surely convince you to consider a share position today.

Upside Potential via S&P 500 Exposure

The stated objective of the NEOS S&P 500 High Income ETF is to “generate high monthly income in a tax efficient manner with the
potential for equity appreciation in rising markets.” There’s a lot to unpack here, and we can start with the “potential for equity appreciation” component.

While the NEOS S&P 500 High Income ETF isn’t exactly an index fund, it more or less replicates a well-known index, the S&P 500. More precisely, the SPYI ETF generally invests in “all of the component securities” of the S&P 500 in the “same approximate proportions as” in the S&P 500.

Consequently, before the cash distributions and management fees are factored in, the NEOS S&P 500 High Income ETF should achieve similar price moves to the S&P 500 stock index. That’s good news for a number of reasons.

For one thing, the S&P 500 comprises a basket of 500 stocks, so you can get instant portfolio diversification with the NEOS S&P 500 High Income ETF. Also, the S&P 500 includes world-famous large-cap names such as Apple (NASDAQ:AAPL), Home Depot (NYSE:HD), NVIDIA (NASDAQ:NVDA), Bank of America (NYSE:BAC), and Coca-Cola (NYSE:KO).

These are established, capital-rich, profitable businesses. Thus, the “potential for equity appreciation in rising markets” is strong as you’re getting exposure to great companies.

In addition, the S&P 500 is weighted more heavily toward businesses with high market capitalizations. As a result, the NEOS S&P 500 High Income ETF provides greater exposure to sector giants like NVIDIA, Apple, Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN).

Historically, the S&P 500 has recovered from each and every drawdown and reached new all-time highs sooner or later. Past performance doesn’t guarantee future returns, but the chances are very good that the NEOS S&P 500 High Income ETF will follow the S&P 500 index higher over the long run.

Big but Safe Yield

Investors should anticipate good returns on their capital because the NEOS S&P 500 High Income ETF share price is likely to move higher with the S&P 500 index. Yet, there’s more to the SPYI ETF than just following the S&P 500.

If you only invest in a typical S&P 500 index fund, you might get an annualized dividend yield of 1% to 2%. That’s not terrible, by any means, but the NEOS S&P 500 High Income ETF strives to generate much more income than that.

Sure, the SPYI ETF will pass on the “dividends received from the Fund’s equity holdings” (i.e., the S&P 500 stock dividends) to the shareholders. Along with that, however, the NEOS S&P 500 High Income ETF uses a strategy of buying and selling call options to extract even more income from the S&P 500.

For the most part, the fund’s income will be derived from writing (selling) covered call options. This is a fairly safe options strategy which may limit the NEOS S&P 500 High Income ETF’s share-price appreciation potential but should also provide substantial income. 

How substantial? Currently, the NEOS S&P 500 High Income ETF features a distribution rate (i.e., the annualized yield before fees are subtracted) of 12.11%. Even after we subtract the annual management fees (known as the expense ratio) of 0.68%, we still get a massive annual yield of 12.11% – 0.68%, or 11.43%.

Not only that, but the NEOS S&P 500 High Income ETF will put cash distributions in your account every month, rather than the typical quarterly distributions. This means that the shareholders can leverage the magic of compounding by reinvesting the SPYI ETF’s cash distributions month after month.

SPYI’s Tax Advantages

Finally, the NEOS S&P 500 High Income ETF can help to improve investors’ return on capital because of the fund’s favorable tax structure. Please note that any questions or issues about taxes should be referred to a qualified tax professional.

According to the fund’s prospectus, taxes on distributions of capital gains for the NEOS S&P 500 High Income ETF are “determined by how long the Fund owned the investments that generated them, rather than how long a shareholder has owned his or her Shares.” So, you don’t have to hold SPYI for a full year in order to get an advantageous long-term capital gains tax rate.

In other words, you should be able to avoid the typically higher short-term capital gains tax rate with the NEOS S&P 500 High Income ETF, regardless of how long you hold the shares. The prospectus states that the fund’s distributions “will be taxable as long-term capital gains, which for non-corporate shareholders are subject to tax at reduced rates of up to 20%.”

This represents a major benefit when it’s time to pay the IRS, no doubt. Hence, along with the huge yield, the diversified S&P 500 exposure, and the fund’s upside potential, the NEOS S&P 500 High Income ETF’s tax advantages make it a must-own for investors in 2025.

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