HYBI: A High-Yield, Tax-Efficient Income Play in a Volatile Market

In an era of economic uncertainty and rising interest rates, income-focused investors are increasingly drawn to high-yield credit strategies. Among the contenders in this space, the NEOS Enhanced Income Credit Select ETF (HYBI) stands out for its unique combination of quantitative bond allocation and tax-efficient options strategies. This article evaluates HYBI's performance against traditional high-yield ETFs, leveraged loan funds, and BDCs, focusing on yield, tax efficiency, and risk-adjusted returns.

HYBI's Dual-Pronged Strategy: Yield and Tax Efficiency

HYBI's 8.68% distribution rate (as of June 2025) is among the highest in its peer group, driven by a blend of bond coupon income and options premiums. Unlike traditional high-yield ETFs like the iShares iBoxx $ High Yield Corp Bond ETF (HYG), which relies solely on bond coupons, HYBI's options overlay—specifically S&P 500 put spreads—adds a second income stream. This dual-income model not only boosts yield but also enhances tax efficiency.

For example, 27% of HYBI's June 2025 distribution was classified as return of capital, reducing taxable income for investors. Additionally, gains from its options overlay qualify as Section 1256 contracts, which are taxed at 60% long-term capital gains and 40% short-term rates, regardless of holding period. This structure is a stark contrast to traditional high-yield bonds, where interest income is taxed as ordinary income, often at higher marginal rates.

Risk-Adjusted Returns: Outperforming in Downturns, Underperforming in Bulls

HYBI's performance highlights a key trade-off: it excels in volatile markets but lags in stable ones. Since its launch in September 2024, HYBI's net asset value (NAV) has returned 10.61% annualized, outperforming the Bloomberg U.S. Corporate High Yield Index's 15.74% over the same period. This outperformance is most evident during market stress. For instance, in 2022, when the high-yield index fell 11%, a predecessor fund with a similar strategy declined only 2.3%.

However, HYBI's tactical approach comes at a cost. In 2025, its 1-year NAV return of 3.33% trailed the index's 6.44%. This underperformance is expected in bull markets, as HYBI's quantitative model prioritizes downside protection over maximum yield. For investors seeking consistent returns in all market conditions, HYBI may not be ideal. But for those prioritizing stability during downturns, it offers a compelling alternative.

Comparative Analysis: HYBI vs. Traditional High-Yield Strategies

To contextualize HYBI's strengths and weaknesses, consider the broader high-yield landscape:

1. Traditional High-Yield ETFs (e.g., HYG, JNK): These funds offer lower fees (e.g., HYG's 0.48%) but lack HYBI's tax-advantaged structure. Their yields are also more vulnerable to interest rate hikes, as they typically hold longer-duration bonds.
2. Leveraged Loan Funds (e.g., BKLN, SRL): These funds provide higher yields (7–9%) and lower volatility than high-yield bonds but are sensitive to economic downturns. HYBI's options overlay offers a more dynamic approach to downside protection.
3. BDCs (e.g., BIZD, PSTH): BDCs deliver attractive yields (7–9%) and tax efficiency but are more volatile and less liquid than ETFs. HYBI's monthly distributions and ETF structure make it more accessible for taxable accounts.

HYBI's unique value proposition lies in its ability to balance yield, tax efficiency, and volatility. Its 4-year average bond duration and options-based hedging reduce sensitivity to rate hikes compared to traditional high-yield ETFs. However, its sector concentration (94% in financial ETFs like USHY) and high turnover rate (>100%) pose risks that investors must weigh.

Investment Implications and Risks

HYBI is best suited for income-focused investors in higher tax brackets who prioritize tax efficiency and downside protection. Its 0.68% expense ratio (capped through September 2025) is competitive with active high-yield funds but higher than passive alternatives. Investors should also consider its limited operating history (launched in 2024) and potential underperformance in bull markets.

Key risks include:
- Interest rate sensitivity: While HYBI's duration is shorter than most high-yield ETFs, rising rates could still pressure its bond holdings.
- Options volatility: The cost of options and market volatility directly impact HYBI's income generation.
- Sector concentration: Overexposure to financials increases vulnerability to regulatory or geopolitical shifts.

Conclusion: A Strategic Complement to High-Yield Portfolios

HYBI's tax-efficient structure and risk-mitigation strategies make it a compelling addition to diversified income portfolios, particularly for investors in higher tax brackets. While it may not outperform traditional high-yield ETFs in all market conditions, its ability to reduce downside risk during downturns justifies its inclusion as a complementary holding. For those seeking a balance of yield, tax efficiency, and volatility control, HYBI offers a unique edge in today's volatile credit markets.