NEOS ETFs: High Yields and Hard Questions on Income Strategy

WESTPORT, Conn. – November 28, 2025 – Asset management firm NEOS Investments has captured the market's attention with its latest monthly distribution announcement, showcasing exceptionally high yields across its suite of options-based Exchange-Traded Funds (ETFs). The November 2025 figures highlight the firm's strategy of generating monthly income from diverse asset classes, with its Bitcoin High Income ETF (BTCI) leading the pack with an annualized distribution rate of 26.73%.

For income-starved investors navigating a complex market, these figures are compelling. NEOS's lineup, which applies options strategies to everything from the S&P 500 to gold and real estate, promises a steady stream of monthly cash flow. The Nasdaq-100 High Income ETF (QQQI) and the Russell 2000 High Income ETF (IWMI) posted rates over 14%, while the S&P 500 High Income ETF (SPYI) came in just under 12%. This announcement solidifies NEOS's position as a prominent player in the rapidly growing derivatives-income ETF space, but it also raises critical questions for investors about the sustainability and composition of these attractive payouts.

Decoding the 'Return of Capital' Strategy

A crucial element underpinning NEOS's income strategy is the tax characterization of its distributions. According to the firm's announcement, a significant portion of the payouts for many of its most popular funds is classified as a "return of capital" (ROC). For instance, recent estimates showed ROC composing 99% of the QQQI distribution and 100% of the IWMI and NIHI distributions.

Historically, ROC has sometimes carried a negative connotation, suggesting a fund is simply returning an investor's own money, which could erode the net asset value (NAV) or principal investment over time. However, in the context of modern options-based ETFs, the strategy is more nuanced. NEOS aims to generate income from selling index option premiums. These premiums are then distributed monthly. By strategically harvesting losses within the portfolio to offset gains, the fund can classify a large part of these distributions as ROC.

For investors, this can be a powerful tool for tax deferral. Instead of being taxed as ordinary income in the current year, ROC distributions reduce an investor's cost basis in the ETF. Taxes are only paid on the resulting capital gains when the shares are eventually sold. If the adjusted cost basis falls to zero, further distributions are treated as capital gains. This approach can significantly enhance after-tax returns, particularly for those in higher tax brackets.

The key risk, as some industry analysts point out, is whether the fund's total return can keep pace with its high distributions. If an ETF consistently pays out more than it earns through options premiums and capital appreciation, it will inevitably lead to NAV erosion. NEOS contends its strategy is designed to prevent this by seeking to capture a portion of the upside in the underlying indexes, aiming for principal growth alongside income generation. Investors are encouraged to consult the detailed 19a-1 notices provided by the firm for a more comprehensive breakdown of each distribution's source.

Beyond Equities: A New Frontier for Income

What sets NEOS apart in the crowded field of income ETFs is the sheer breadth of asset classes it targets. While many competitors focus on large-cap equity indexes like the S&P 500 or Nasdaq-100, NEOS has ventured into more niche and volatile markets, applying its options-overlay strategy to generate yield.

The Bitcoin High Income ETF (BTCI), launched in late 2024, is a prime example. By selling call options against its holdings in Bitcoin ETFs, it turns the cryptocurrency's notorious volatility into a source of income, resulting in its market-leading 26.73% distribution rate. Similarly, the firm offers high-income ETFs for gold (IAUI), real estate (IYRI), and international equities (NIHI), providing investors with tools to diversify their income streams far beyond traditional stocks and bonds.

This innovative approach allows investors to gain income from asset classes that do not typically offer significant yields. However, it also layers the complexity of derivatives on top of already risky assets. The strategy's success hinges on the management team's ability to navigate the unique volatility and risk profile of each underlying market, from the digital frontier of crypto to the interest-rate sensitivity of long-duration Treasury bonds in its TLTI fund.

Navigating a Crowded Options-ETF Market

Founded in 2022 by industry veterans, NEOS has made a significant impact in a short time. The firm is now the 33rd largest ETF provider in the U.S., with over $16 billion in assets under management. This rapid growth has been fueled by intense investor demand for income, which has propelled the entire options-oriented ETF category to an estimated $140 billion market.

NEOS competes directly with giants like the JPMorgan Equity Premium Income ETF (JEPI), the world's largest active ETF, and popular funds from Global X like QYLD. While NEOS's expense ratios, mostly around 0.68% for its core income funds, are higher than passive index funds, they are competitive within the actively managed options space. The firm's value proposition rests on its active management, tax-efficient structure, and potential for some upside capture.

Industry recognition has followed its asset growth. The NEOS Nasdaq-100 High Income ETF (QQQI) was named "Best New Active ETF" at the 2025 ETF.com Awards, and the firm itself was recognized as the "Best Option Strategies ETF Issuer" in its size class by ETF Express. These accolades, along with a strategic investment from industry expert Tom Lydon, lend credibility to the firm's claim of being a pioneer in the space.

The Inherent Trade-Offs: Risk and Capped Upside

Despite the allure of high monthly checks, investors must understand the fundamental trade-offs of these strategies. The primary drawback of selling call options is that it caps the fund's upside potential. During powerful bull markets, options-income ETFs will almost certainly underperform their underlying indexes because the gains are limited once the strike price of the sold calls is reached. The income received from premiums provides a cushion in flat or down markets but acts as a ceiling during strong rallies.

Furthermore, the risks extend beyond just opportunity cost. As clearly stated in their prospectuses, these funds involve derivative risks, including the possibility that options pricing may not perfectly correlate with the underlying assets. The use of leverage can magnify both gains and losses. Specific funds carry their own unique dangers: BTCI is exposed to the extreme volatility of the crypto market, IWMI to the higher volatility and lower liquidity of small-cap stocks, and TLTI to the significant interest rate risk inherent in long-duration bonds.

Ultimately, NEOS offers a sophisticated solution for a specific investment goal: generating high, tax-efficient monthly income. The firm's innovative application of options strategies across a diverse asset base provides new tools for portfolio construction. For investors weighing these factors, the allure of high monthly payouts must be balanced against a thorough understanding of the underlying mechanics, inherent risks, and long-term performance implications.