SPYI ETF: is the NEOS S&P 500 High Income fund a buy?

The NEOS S&P 500 High Income ETF (SPYI) is gaining traction among income investors because of its substantial yield. Its stock has rebounded to $47.50 after plunging to a low of $44.87 earlier this month. This rebound has coincided with the strong rebound of American stocks.

What is the NEOS S&P 500 High Income ETF?

Demand for active funds has jumped this year. As I wrote on Monday, the JPMorgan Equity Premium ETF (JEPI) has added over $29 billion in total assets under management (AUM). This trend has made it one of the biggest funds in the US. 

The SPYI ETF is an active fund that is relatively similar to JEPI in that it uses the concept of covered calls to attract returns. As a result, the current advertised yield stands at 12.50%, which is higher than what most ETFs are yielding. 

It has also seen strong inflows this year as its total assets under management (AUM) has jumped to over $414 million. Data shows that it has had inflows in all months of this year. They peaked at $101 million in June and have been falling since then. 

The SPYI ETF invests in companies in the S&P 500 index and then employs an options strategy that helps it to generate returns. As a result, its biggest components are well-known companies like Apple, Microsoft, Amazon, Nvidia, and Alphabet. Most of these firms are in the technology sector.

By investing part of its funds in the SPX index, the SPYI ETF takes part in its uptrend and the dividends it offers. The other part of its income is known as call options. The concept is quite simple.

After investing in the SPX, the fund managers then sell its call options and receive a premium. The overall return will depend on how the index trades in the duration of the options contract. 

In this case, if the S&P 500 index rises, the SPYI ETF will benefit since it will make money using the options premium and the index uptrend. If it remains the same, the fund will also be in the money through the premium. Also, if the index drops, losses will be a bit hedged by the premium.

Is SPYI a good investment?

Still, SPYI investors need to be careful about the advertised yield, which currently stands at over 12%. The reality is that this yield always fluctuates, which explains why the total return is almost similar to that of SPY, as shown below.

The other challenge for investing in SPYI is that it is not a cheap fund. It has an expense ratio of 0.68% while the SPDR S&P 500 ETF has a ratio of 0.09%. A 0.68% ratio is quite big, especially when you have more money invested in a long period. These costs always add up.

The high expense ratio would make sense if the fund was generating huge returns. But as shown above, the fund’s performance is in line with what the SPY fund returns.

The other concern is that SPYI’s actual return is lower than the advertised one when you factor in the expenses. In most months, the funds net investment income stands at about 4.15 cents while the return of capital is about 44.49 cents. This means that about 9% of the distribution comes from its strategy.

Therefore, in most cases, active funds like SPYI are usually not all that good investments. This is the same thing we have seen with TSLY, which advertises a 70% yield.