IYR vs. IYRI: Evaluating the Enhanced Income Strategy of IYRI in a High-Yield REIT Landscape

In today's income-starved market, investors are increasingly seeking strategies that balance yield with risk management. The real estate sector, long a cornerstone of dividend-focused portfolios, has seen innovative approaches emerge to address these demands. Two ETFs—iShares U.S. Real Estate ETF (IYR) and NEOS Real Estate High Income ETF (IYRI)—represent contrasting philosophies in this space. This article evaluates their risk-adjusted returns and tax efficiency, offering insights into how IYRI's options-based strategy might appeal to income-conscious investors.

Risk-Adjusted Returns: A Tale of Two ETFs

IYR, a traditional REIT ETF with a 0.42% expense ratio, has historically delivered a 2.49% dividend yield. However, its Sharpe ratio of 0.61 (as of August 2025) lags behind the S&P 500's 0.85, indicating suboptimal risk-adjusted returns. Over the past decade, IYR's annualized returns have averaged 5.81%, but its volatility—evidenced by a 74.13% maximum drawdown during the 2009 financial crisis—highlights its susceptibility to market downturns.

In contrast, IYRI, launched in early 2025, employs a data-driven call option strategy to enhance income. While its Sharpe ratio remains undisclosed due to its short track record, IYRI's 6.75% dividend yield (as of 2025) dwarfs IYR's. The fund's volatility metrics—20-day (6.90%) and 200-day (18.17%)—suggest moderate risk, though its active management introduces execution risks. IYRI's risk-adjusted performance rank of 65 out of 100 (as of August 2025) indicates it balances returns and risk reasonably well for its peer group.

Tax Efficiency: The Hidden Edge of IYRI

Tax efficiency is a critical factor in today's high-income environment. IYRI's structure offers a distinct advantage: approximately 96% of its distributions are classified as return of capital (ROC), which reduces investors' cost basis without immediate tax liability. This contrasts sharply with IYR, where distributions are typically taxed as ordinary income or capital gains.

Moreover, IYRI's use of Section 1256 contracts (options on ETFs) ensures that any realized gains are taxed at a favorable 60/40 long-term/short-term capital gains rate. This structure mitigates the impact of the 3.8% Net Investment Income Tax (NIIT) for many investors, as ROC is not considered taxable income for this tax. For IYR, the absence of such a tax-advantaged framework means investors face higher tax drag, particularly in high-income brackets.

Strategic Implications for Income Investors

The choice between IYR and IYRI hinges on investor priorities:
- IYR suits those prioritizing cost efficiency and a traditional real estate exposure, albeit with lower yields and less favorable risk-adjusted metrics.
- IYRI appeals to investors seeking enhanced income and tax efficiency, willing to accept higher expense ratios (0.68%) and moderate volatility for a yield that is 170% higher than IYR's.

However, IYRI's active management and options overlay introduce complexity. Investors must weigh the potential for higher returns against the risks of strategy execution and market volatility. For example, IYRI's 12.12% maximum drawdown since inception is less severe than IYR's historical drawdowns, but its 20-day volatility rank of 40 out of 41 underscores its sensitivity to short-term price swings.

Conclusion: Navigating the High-Yield REIT Landscape

In a market where income generation is paramount, IYRI's innovative approach offers a compelling alternative to traditional REIT ETFs like IYR. Its tax-advantaged structure and enhanced yield make it particularly attractive for taxable accounts, while its moderate risk profile aligns with a diversified portfolio. That said, IYR remains a viable option for investors prioritizing simplicity and cost efficiency.

For those seeking to optimize after-tax returns, IYRI's ROC structure and options-based strategy provide a unique edge. However, due diligence is essential to ensure alignment with individual risk tolerance and tax circumstances. As the real estate sector evolves, the interplay between traditional and active strategies will likely shape the next phase of income investing.