In the wake of the banking sector and bond volatility, the Fed raised rates another quarter point and most Fed officials are anticipating at least one more quarter-point raise as it continues to assert pressure on the economy in efforts to curtail inflation. Markets have remained markedly volatile in trading over the last two weeks and advisors and investors looking to shore up defensively in cash should consider the NEOS Enhanced Income Cash Alternative ETF (CSHI) for generating income on cash allocations.
The risk of a short-term bank crisis seems to have passed with the Fed takeover of Silicon Valley Bank and Signature Bank, the mega-merger of UBS Group and Credit Suisse overseas, and the creation of the Bank Term Funding Program as an emergency lending option for banks. Bond markets have been particularly volatile as investors flooded into Treasuries in the wake of SVB’s collapse, dragging yields down significantly — bond yields and prices move inversely.
“The shift to higher interest rates that we’ve seen over the last week reflects the concerns around the banking system subsiding – and also an increased awareness that the Fed is unlikely to be cutting rates in 2023,” Phillip Nelson, director of asset allocation research at NEPC, told CNBC.
Sustained rates will likely remain a challenge to equities this year as recession risk rises, and with bond volatility and banking sector concerns still reverberating through markets, advisors and investors are left considering increasing their cash allocations as a hedge against recession risk, inflation, and high rates.
Generate Income On Your Cash Allocations With CSHI
Cash and cash alternatives are appealing for the liquidity they offer and the stability they can provide when equities and/or bonds are underperforming. They’re seen as a safety net of sorts, and advisors are already putting cash allocations to work for them through funds like the NEOS Enhanced Income Cash Alternative ETF (CSHI).
CSHI is an actively managed ETF to consider that’s offering a distribution yield of 5.66%, as of February 28, 2023. The fund launched in August 2022 and is already garnering attention; year-to-date it’s already brought in $23.5 million in net flows.
It’s an options-based fund that is long on three-month Treasuries and also sells out-of-the-money SPX Index put spreads that roll weekly to account for market changes and volatility. It seeks to deliver 100–150 basis points above what 90-day Treasuries are yielding while also taking advantage of tax-loss harvesting opportunities and the tax efficiency of index options.
Three-month T-bills are currently yielding 4.76%, higher than their long-term average of 4.17% and well above the 0.53% rates last year at this time.
See also: “Troy Cates Talks Income and Yield for CSHI and SPYI on ETF IQ“
The put options that the fund uses are not ETF options but instead are S&P 500 index options that are taxed favorably as Section 1256 Contracts under IRS rules. This means that the options held at the end of the year are treated as if they had been sold on the last market day of the year at fair market value, and, most importantly, any capital gains or losses are taxed as 60% long-term and 40% short-term, no matter how long the options were held. This can offer noteworthy tax advantages, and the fund’s managers also may engage in tax-loss harvesting opportunities throughout the year on the put options.
CSHI has an expense ratio of 0.38%.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
