NEOS Urges Tax-Focused Review as Options-Income ETFs Surge

In a recent webcast titled “Rethinking Tax-Efficient Income Generation,” NEOS Investments co-founders Troy Cates and Garrett Paolella said investors are moving their focus from headline yield to after-tax returns, citing $203.67 billion of inflows into options-income ETFs over the past three years and a universe of more than 880 funds. The webcast urged advisors and investors to make tax efficiency a key factor in product selection.

The speakers described the options-income market as having expanded beyond covered-call equity funds into a wide range of structures. Funds now use index options, single-stock options, swaps, structured notes and other derivatives across equities, fixed income, commodities, real assets and digital assets. The co-founders said that variation in structure creates different tax outcomes for investors.

NEOS highlighted index option contracts that qualify for Section 1256 tax treatment, which applies a blended 60% long-term and 40% short-term capital gains classification regardless of holding period. Cates noted the firm favors those contracts for their tax profile, liquidity, transparency and contract size. He said weekly or monthly option rolls create regular realized gains or losses, and advisers should consider how those events affect after-tax returns.

The webcast also outlined additional techniques that can affect after-tax income. These include tax-loss harvesting, return-of-capital distributions and passing through qualified dividend income, which can be taxed at lower rates. The presenters pointed out that interest from U.S. Treasury holdings is exempt from state and local income taxes. Cates added that lowering cost basis and deferring taxes through return of capital may benefit some clients from an IRS perspective.

Paolella described options overlays as tools that can be applied across asset classes to generate income beyond traditional dividend and bond sources. He said advisors are increasingly evaluating total return, tax efficiency and sustainability of income alongside distribution size when comparing products. The presenters stressed that similar headline yields can result in different after-tax outcomes depending on product construction.

NEOS provided performance examples from its lineup to illustrate different uses of options overlays. The S&P 500 High Income ETF (SPYI), which combines core equity exposure with a data-driven call overlay, has returned 70.79% since inception and carries a distribution rate of 12.08%. The Enhanced Income 1-3 Month T-Bill ETF (CSHI) has returned 22.49% since inception with a distribution rate of 4.70%.

Both founders urged careful due diligence on options-income ETFs. Cates pointed to ETF transparency, noting many advisers publish holdings daily on their websites. Paolella encouraged advisors and investors to research product construction and tax treatment and to align tax-aware strategies with overall portfolio objectives.