The NEOS S&P 500 High Income ETF (SPYI) is designed to deliver regular income through its covered call strategy, but a comprehensive examination reveals its limitations, especially when benchmarked against conventional S&P 500 funds. Over the past three years, SPYI has conspicuously trailed the Vanguard S&P 500 ETF (VOO), indicating that its income-focused strategy comes at the cost of capital appreciation. This underperformance is largely due to the inherent structure of covered calls, which cap upside potential during market rallies. Additionally, SPYI’s elevated expense ratio further diminishes its appeal for investors seeking efficient, long-term growth. In contrast, VOO, with its minimal fees and direct S&P 500 exposure, consistently delivers superior total returns, underscoring the benefits of a low-cost, broad-market investment approach.
Understanding SPYI's Income Strategy and Its Impact on Returns
The NEOS S&P 500 High Income ETF (SPYI) is structured to provide investors with a steady stream of monthly income through a covered call strategy. This involves holding a portfolio of S&P 500 stocks and simultaneously selling call options against them, generating premium income. While this approach can offer some level of downside protection during market downturns, it fundamentally limits the fund's participation in significant market uptrends. When the broader market, as represented by the S&P 500, experiences strong rallies, the upside potential of SPYI is capped because the call options sold will likely be exercised, forcing the fund to sell its underlying stocks at a predetermined price. This mechanism prevents SPYI from fully benefiting from substantial appreciation in the underlying assets, thereby sacrificing potential capital gains for consistent income. Over a three-year period, this strategy has resulted in SPYI underperforming traditional S&P 500 index funds like VOO by a considerable margin of 20% in terms of total returns.
Furthermore, SPYI's operational costs significantly erode its overall returns. With an expense ratio of 0.68%, it is markedly more expensive than passively managed S&P 500 ETFs such as VOO, which boasts an expense ratio of just 0.03%. This substantial difference in fees creates a continuous drag on SPYI's performance, making it a less efficient investment vehicle for long-term wealth accumulation. In an environment characterized by robust economic tailwinds, such as increased AI capital expenditure, rising defense spending, and anticipated lower interest rates, the broader S&P 500 is poised for sustained growth. SPYI's design, which prioritizes income generation over capital growth, makes it ill-suited to capture the full benefits of such a bullish market environment. Investors aiming for long-term growth and capital appreciation would find a standard S&P 500 ETF to be a more cost-effective and rewarding option.
Why Traditional S&P 500 ETFs Outperform Income-Focused Strategies in Bull Markets
Traditional S&P 500 ETFs, such as the Vanguard S&P 500 ETF (VOO), inherently offer superior performance in bull markets due to their direct and unhedged exposure to the broader index. Unlike income-focused strategies like NEOS S&P 500 High Income ETF (SPYI), which employ covered calls, VOO does not cap its upside potential. This means that during periods of strong economic growth and market rallies, VOO fully participates in the appreciation of its underlying S&P 500 constituents, leading to substantial capital gains. The core philosophy behind VOO is to track the performance of the S&P 500 index as closely as possible, providing investors with broad market exposure at a minimal cost. This straightforward approach allows investors to benefit directly from the innovation and growth of the largest U.S. companies, making it a powerful tool for long-term wealth creation, particularly when market sentiment is positive.
The distinction in expense ratios further solidifies the case for traditional S&P 500 ETFs. VOO's remarkably low expense ratio of 0.03% ensures that more of an investor's returns are retained rather than being siphoned off by management fees. In contrast, SPYI's 0.68% expense ratio, though designed to cover the costs associated with its active covered call strategy, acts as a significant drag on its performance. Over time, these seemingly small differences in fees can compound dramatically, leading to a substantial divergence in total returns between the two types of ETFs. Given the current economic landscape, characterized by strong tailwinds from AI advancements, increased defense spending, and a favorable interest rate outlook, a bullish environment for equities is anticipated. In such a scenario, an unconstrained, low-cost investment in the S&P 500, as offered by VOO, is strategically positioned to capture maximum growth, making it a far more attractive option than an income-centric fund like SPYI that sacrifices growth for yield.
