Tax-Efficient Real Estate Income: Leveraging IYRI for Double-Digit Cash Flow and Downside Protection

In an era where traditional income-generating assets like bonds offer historically low yields, investors are increasingly turning to real estate vehicles to secure robust cash flow. Among these, the NEOS Real Estate High Income ETF (IYRI) has emerged as a compelling option, combining tax efficiency, high monthly distributions, and downside protection through a unique covered call strategy. This article explores how IYRI leverages these features to deliver double-digit returns while mitigating risks in volatile markets.

Tax Efficiency: The Return of Capital Advantage

IYRI's structure as an exchange-traded fund (ETF) that primarily invests in U.S.-listed real estate investment trusts (REITs) is complemented by a tax-advantaged distribution model. According to NEOS Investments, approximately 79% of the fund's most recent distribution was classified as a return of capital. This classification allows investors to defer capital gains taxes on that portion of the distribution, effectively reducing their immediate tax burden. Additionally, the fund's covered call strategy involves selling options on ETFs tracking the Dow Jones U.S. Real Estate Capped Index, which are classified as Section 1256 contracts. These contracts are taxed at a favorable 60/40 long-term/short-term capital gains rate, further enhancing tax efficiency.

For investors in higher tax brackets, this structure can significantly improve after-tax returns. As stated by a BestETF profile, IYRI's 10.96% distribution rate as of August 31, 2025, combined with its tax-advantaged treatment, positions it as a standout option for those seeking income without a heavy tax penalty.

Income Generation: The Covered Call Strategy

IYRI's core strategy revolves around selling call options on its portfolio of REITs to generate additional income. This approach not only boosts yield but also introduces a layer of downside protection. By collecting premiums from option sales, the fund creates a buffer against potential declines in the value of its underlying assets. For example, during periods of market volatility-such as those driven by trade policy uncertainty-covered call strategies like IYRI's have historically outperformed the broader market, as detailed in an Apex Liberation analysis.

The fund's top holdings, including Welltower Inc., Prologis, Inc., and American Tower Corporation, are diversified across commercial, industrial, and residential real estate sectors, which helps sustain consistent income generation even in uncertain environments. As of September 2025, the fund's 30-Day SEC Yield of 3.12% reflects its ability to balance income and risk.

Downside Protection: A Double-Edged Sword

While covered call strategies offer a hedge against market declines, they also cap upside potential. During prolonged bull markets, IYRI may underperform compared to traditional REIT ETFs, as the sold call options limit gains when the underlying assets rise significantly. However, this trade-off is often worth it for income-focused investors prioritizing stability.

A 2025 analysis by Apex Liberation notes that covered call ETFs generally outperform during downturns, particularly when using aggressive strategies like at-the-money options. IYRI's performance in September 2025, which saw a 2.78% return on a market price basis, underscores its resilience during volatile periods. While specific historical data on IYRI during the 2008 or 2020 market crashes is unavailable, broader market trends suggest that such strategies can cushion losses during sharp declines, as discussed in a Morningstar analysis.

Risk Considerations and Strategic Allocation

Despite its advantages, IYRI is not without risks. The fund's active management and reliance on options trading introduce complexity, and its 0.68% expense ratio may deter cost-sensitive investors. Additionally, the return of capital classification means that distributions could reduce the fund's net asset value (NAV) over time, potentially impacting long-term growth.

To mitigate these risks, investors should consider IYRI as part of a diversified portfolio. Pairing it with defensive equity strategies or buffer ETFs-structured products that cap losses during downturns-can further enhance risk-adjusted returns, as noted in BlackRock insights. For instance, a hypothetical portfolio combining IYRI with a buffer ETF offering 100% downside protection over a one-year period could balance high income with capital preservation.

Conclusion: A Strategic Play for Income-Seeking Investors

IYRI represents a sophisticated approach to real estate income generation, blending tax efficiency, high yields, and downside protection. While its covered call strategy may limit gains in rising markets, its ability to cushion losses during downturns makes it an attractive option for risk-aware investors. As the real estate sector continues to evolve, vehicles like IYRI offer a compelling way to navigate volatility while securing consistent cash flow.

For those seeking to optimize their real estate exposure, IYRI's unique structure and performance metrics warrant serious consideration-particularly in a landscape where traditional income sources remain under pressure.