The NEOS S&P 500 High Income ETF (SPYI) provides an annual distribution yield of approximately 12% [1], though much of that payout consists of investors' own capital.
This structure matters because it changes how investors are taxed and how they perceive their gains. Rather than receiving traditional income, shareholders are seeing a return of capital that lowers their cost basis, meaning tax obligations are postponed until the shares are sold.
Data indicates that 95% of the payouts from the previous year were classified as return of capital [6]. This mechanism allows the fund to maintain high monthly distributions while legally shielding the majority of those payments from immediate IRS taxation.
The ETF utilizes a covered-call strategy to generate these distributions [1]. While the yield is high, the fund has an expense ratio of 0.68% [2], which costs an investor $68 annually for every $10,000 invested [3].
Performance metrics show the fund has lagged behind its index by 81 basis points [4]. However, the adjusted share price has increased by 77% since the fund launched in 2022 [5].
Similar products follow a comparable model. For example, the QQQI ETF offers a monthly yield of approximately 14% [7]. These funds trade on the BATS exchange in the U.S. and target investors seeking immediate cash flow from the S&P 500 and other indices.
Because the payouts are treated as a return of capital, they rewrite the investor's cost basis [1]. This process effectively creates a tax deferral; the investor does not pay taxes on the distribution now, but will likely face a higher capital gains tax when they eventually exit the position.
“95% of last year’s payout was your own capital coming back”
The SPYI ETF operates as a yield-enhancement tool rather than a traditional dividend fund. By classifying distributions as return of capital, the fund provides immediate liquidity to investors without triggering immediate tax events. However, this reduces the investor's original investment basis, potentially increasing the tax burden upon the eventual sale of the asset.
