Why SPYI Is Outperforming the S&P 500 and Why Income Investors Should Act Now

In a market environment defined by low yields and rising volatility, income-focused investors are increasingly seeking alternatives to traditional S&P 500 ETFs like SPY and VOO. The NEOS S&P 500 High Income ETF (SPYI) has emerged as a compelling solution, leveraging a covered-call strategy and tax-efficient structure to deliver superior returns and consistent monthly income. As of June 30, 2025, SPYI's 12.15% distribution rate and outperformance over the S&P 500 Index position it as a must-consider option for long-term investors prioritizing cash flow and tax optimization.

The Covered-Call Edge: Generating Income Without Sacrificing Growth

SPYI's core strategy revolves around selling and purchasing SPX index call options, a dynamic approach that distinguishes it from passive ETFs. By selling call options, the fund collects premiums that bolster its yield, while purchasing out-of-the-money calls allows it to retain upside potential in rising markets. This dual strategy has proven effective in 2025's volatile climate, where SPYI's active management has enabled it to adapt to shifting conditions. For example, during periods of heightened volatility, SPYI's managers have reduced the number of options sold or shifted to longer-dated contracts, preserving capital while maintaining income targets.

The results speak for themselves. SPYI's 12-month NAV performance of 13.54% as of June 2025 outperformed the Cboe S&P 500 BuyWrite Monthly Index (10.25%) and trailed the S&P 500 Index (15.16%) by a narrow margin. However, when factoring in SPYI's tax advantages and high yield, its value proposition becomes far more compelling. Traditional ETFs like SPY and VOO, which offer yields of 1.2% and 1.19% respectively, lack the income-generating mechanisms that SPYI employs.

Tax Efficiency: A Game-Changer for Income Investors

SPYI's tax structure is a critical differentiator. By utilizing SPX index options classified as Section 1256 Contracts, the fund ensures that gains are taxed at a favorable 60/40 long-term/short-term capital gains rate, regardless of holding period. This contrasts sharply with traditional ETFs, where dividends are often taxed at ordinary income rates. Additionally, SPYI's distributions are predominantly return of capital (98% in its most recent payout), which reduces investors' cost basis and defers taxable events.

For high-net-worth investors, this tax efficiency can significantly enhance after-tax returns. Consider an investor in the 37% marginal tax bracket: a $1,000 dividend from SPY would incur $370 in taxes, while SPYI's return of capital would reduce the investor's cost basis by $1,000, deferring taxes until the asset is sold. This structural advantage makes SPYI particularly attractive in taxable accounts.

Cost vs. Value: Justifying the Premium

Critics may point to SPYI's 0.68% expense ratio, which is higher than SPY's 0.095% and VOO's 0.03%. However, this premium is justified by the fund's active management and tax-loss harvesting strategies. SPYI's managers systematically sell losing options and equity positions to offset gains, reducing taxable income. Over the past year, this approach has enhanced after-tax returns, making the expense ratio a worthwhile trade-off for income-focused investors.

Moreover, SPYI's risk-adjusted performance underscores its value. With a Sharpe Ratio of 1.11 and a maximum drawdown of -7.78% (compared to the S&P 500's -9.21%), SPYI has demonstrated resilience during downturns. Its lower volatility (11.19% vs. S&P 500's 15.15%) further supports its appeal for conservative income portfolios.

Why Act Now?

The case for SPYI is strongest in today's market. With interest rates stabilizing and volatility remaining elevated, the fund's covered-call strategy is well-positioned to capitalize on premium income and downside protection. Additionally, SPYI's recent $1.77 billion in net inflows (as of July 2025) signals growing institutional and retail adoption, which could drive further performance as the fund scales.

For investors seeking to replace traditional S&P 500 ETFs with a higher-yielding alternative, SPYI offers a balanced approach. While it may underperform in a sustained bull market, its ability to generate consistent income, mitigate downside risk, and enhance tax efficiency makes it a superior choice for long-term, income-focused portfolios.

Final Thoughts

The NEOS S&P 500 High Income ETF is redefining what's possible for S&P 500 exposure. By combining active options management with tax-advantaged structures, SPYI delivers a unique blend of income, growth, and risk mitigation. For investors who prioritize monthly cash flow and tax efficiency, the time to act is now—before the fund's growing popularity drives up its expense ratio or dilutes its strategy. In a world where traditional ETFs fall short, SPYI stands out as a beacon for income-focused investors.