AndreyPopov/iStock via Getty Images The NEOS S&P 500 High Income ETF (BATS:SPYI) is popular with income investors due to its high monthly distribution. It also enjoys several structural advantages and a portfolio allocation that make it an attractive income fund in many ways. That being said, there are also some cons to the fund, so we will dig into the pros and cons of the fund, discuss why it has significantly outperformed peers recently, and share our thoughts on whether or not the fund is worth buying for income investors. SPYI Pros Perhaps the greatest strength of SPYI is its design with tax efficiency in mind. In contrast to some of its peers like the JPMorgan Equity Premium Income ETF (JEPI) and the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ), SPYI delivers distributions that are almost entirely deferred long-term capital gains. It does this by ensuring that the current cost strategy it employs is taxed at 60% long-term and 40% short-term capital gains tax rates, utilizing tax loss harvesting, and classifying as much of its distributions as possible as return on capital. Another strength of the fund is that – as the chart below illustrates – it provides relatively consistent distributions by declaring distributions at roughly 1% of the current NAV each month. For income investors, this relative stability is an attractive feature, as it enables them to better plan how well their portfolio’s passive income will cover their living expenses. Data by YCharts A third big strength of SPYI, and where the good news kicks in, is that its top six holdings are all leading artificial intelligence stocks, comprising a whopping one-third of the fund’s total portfolio. These stocks include Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), Meta Platforms (META), and Alphabet (GOOG) (GOOGL). Microsoft has established itself as probably the strongest generative AI stock in the market, given its partnership with OpenAI. Apple recently saw its stock price jump on news that it incorporated artificial intelligence into its newest iPhone product. Meanwhile, Nvidia is the 800-pound gorilla in the AI semiconductor industry, experiencing explosive growth with no end in sight. This strong performance has significantly contributed to SPYI’s outperformance since it launched. Its strategic active management has enabled it to lead peer competitors like JEPI in performance since its launch in mid-2022. Data by YCharts Last, but not least, SPYI offers an attractive 11.7% distribution yield on a trailing 12-month basis, which is very appealing, especially because it gives investors exposure to AI stocks that otherwise yield little to no dividend. With the AI boom still in its early stages, SPYI gives investors a great chance to combine consistent monthly distributions with active management, tax efficiency, and significant exposure to AI. SPYI Cons That being said, investors do pay for these benefits given SPYI’s 0.68% expense ratio. This management fee is considerably higher than JEPI’s 0.35% and even further above prominent dividend growth funds like the Schwab U.S. Dividend Equity ETF (SCHD), which has a mere 0.06% expense ratio. Another weakness is that the fund lacks meaningful exposure to some leading dividend-paying sectors like real estate (VNQ) (2.01%), utilities (XLU) (2.4%), and energy (XLE) (3.89%). Moreover, we are quite bullish on all three of these sectors, viewing them as undervalued and likely to benefit materially if and when sentiment or interest rates shift. Finally, while SPYI has outperformed peers like JEPI, it still lags far behind the total returns of the S&P 500 (SPY) since its launch. This is not overly problematic given that SPYI caters to investors looking for attractive yields, but it does trail behind in terms of total returns. Moreover, the substantial size of the performance gap between them, nearly 50%, should be kept in mind by investors so that they can go into the investment with eyes wide open that SPYI has a tendency to underperform, especially in a bull market dominated by large-cap tech stocks. Data by YCharts Investor Takeaway We believe SPYI could potentially be part of a well-diversified income portfolio by providing income investors significant exposure to leading technology and AI stocks, while also providing a substantial monthly yield boost. However, its high expense ratio, material underperformance relative to the S&P 500, and lack of exposure to several leading income sectors prevent it from being a worthwhile choice for a large core holding in a long-term oriented income portfolio. Nevertheless, SPYI remains well-positioned to continue generating very attractive returns and income as long as the good news for AI continues, given that about one-third of its portfolio is invested in leading AI names.
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