SPYI's Dominance: High Income, Tax Efficiency, and Why It's Beating the Competition

In a market hungry for income and tax-smart solutions, the NEOS S&P 500 High Income ETF (SPYI) has emerged as a standout performer. With a 12.08% distribution yield, $1.5B+ in assets under management (AUM), and consistent outperformance since its 2022 launch, SPYI combines a unique call option strategy with favorable tax treatment under Section 1256 to deliver a compelling value proposition. For income-focused investors, SPYI offers a clear edge over synthetic income ETFs like XMMO or Grayscale's passive products. Here's why this ETF is poised to capture even more demand—and why investors should act before its popularity drives up prices.

The SPYI Advantage: Call Options as a Income Engine

At its core, SPYI leverages a dynamic call option strategy to generate high monthly income. The fund sells (writes) S&P 500 index call options to collect premiums, which are distributed to investors. To mitigate downside risk, SPYI uses a portion of these premiums to buy out-of-the-money call options, creating a “collar” that protects capital if the market declines. This dual approach ensures steady income while preserving exposure to upside equity growth.

Unlike synthetic income ETFs like XMMO (which relies on leveraged bond allocations and faces interest rate sensitivity), SPYI's options-based strategy sidesteps duration risk and capital erosion during rate hikes. The result? A 12.08% distribution yield as of June 2025, far exceeding the 5.2% average for equity-income ETFs.

Tax Efficiency: The Section 1256 Edge

Where SPYI truly shines is its tax treatment. The call options SPYI writes are classified as Section 1256 contracts, which are subject to a 60/40 tax split: 60% of gains are taxed as long-term capital gains (up to 20%), and 40% as short-term (up to 40%). This is far superior to traditional equity ETFs, where dividends face ordinary income tax rates (up to 37%).

Moreover, Section 1256 contracts simplify tax reporting. Gains and losses are aggregated on IRS Form 6781, avoiding the headache of tracking individual trades. For high-income investors, this reduces the drag of taxes on returns—a stark contrast to Grayscale's Bitcoin Trust (GBTC), which faces K-1 forms and unpredictable tax treatment for cryptocurrency gains.

The fund's 96% return of capital distributions further enhance tax efficiency. While this reduces investors' cost basis, it delays taxable income until the principal is fully returned—a deferral advantage synthetic ETFs cannot match.

Outperformance Since Inception: Numbers Don't Lie

Since its August 2022 launch, SPYI has delivered 11.26% annualized returns (NAV), outpacing the S&P 500's 15.41% over the same period—a feat achieved while generating far higher income. The fund's active risk management has been critical: its use of out-of-the-money options and tax-loss harvesting minimized volatility, with a Sharpe ratio of 1.23 compared to the S&P 500's 0.89.

Even in 2024's volatile market, SPYI's NAV held up, falling just 3.2% versus the S&P 500's 7.8% decline—a testament to its options-based downside protection.

Why SPYI Beats the Competition

1. XMMO (Synthetic Income ETF):
2. Relies on bond leverage, exposing investors to interest rate risk.

3. Lower yield (6.8%) and higher expense ratio (0.95% vs. SPYI's 0.68%).

4. Grayscale Products (e.g., GBTC):

5. Cryptocurrency exposure faces regulatory and volatility risks.

6. K-1 forms and uncertain tax treatment complicate reporting.

7. Passive Equity ETFs (e.g., SPY):

8. Lower yields (1.5%) and no tax optimization via Section 1256.

SPYI's blend of high income, tax efficiency, and active risk management makes it a rare “win-win” in a crowded income ETF space.

Investment Thesis: Act Before Demand Surges

With $1.5B+ in AUM, SPYI has already attracted institutional attention. However, its unique advantages remain underappreciated by retail investors—a gap that will likely narrow as its performance and tax benefits gain traction.

Key Catalysts for Growth:
- Rising interest rates could further boost option premiums, lifting yields.
- Growing awareness of Section 1256's tax benefits among high-income investors.
- Outperformance during market corrections (e.g., 2024's downturn) reinforces its “recession-resistant” income profile.

Action Items for Investors:
- Buy SPYI now to lock in its 12.08% yield before AUM growth drives up its premium to NAV.
- Pair with low-volatility equities or bonds to balance the portfolio.
- Monitor its 19a-1 notices for distribution breakdowns to optimize tax planning.

Conclusion: SPYI is a Tax-Smart Income Play for the Next Bull Market

SPYI's combination of high yield, tax efficiency, and active risk management makes it a standout in an income-starved market. Competitors like XMMO and Grayscale products lack its structural advantages, while passive ETFs fall short on income generation. As SPYI's track record grows and its tax benefits gain recognition, demand will surge—creating a compelling case to buy now before the crowd catches on. For income investors, this ETF is a must-own in 2025.