BTCI Gets It Right

Summary The NEOS Bitcoin High Income ETF offers a balanced approach for income investors, blending high monthly distributions with Bitcoin exposure. BTCI employs options strategies and return of capital (ROC) for tax-efficient income, maintaining a steady NAV unlike riskier high-yield ETFs.

While BTCI slightly underperforms direct Bitcoin holdings like IBIT, it delivers a substantial 28% annualized yield with only modest capital gains forfeiture. BTCI's structure provides attractive, stable income without significant NAV erosion, making it a compelling choice for income-focused investors seeking crypto exposure.

The newer income-focused ETFs generally use similar covered call strategies to enhance yields, but they can differ widely in structure and approach. On the "safe" and relatively low-yield side, there are funds such as the Amplify CWP Enhanced Dividend Income ETF ( DIVO ) that provide a dividend of around 5%.

On the other side of the scale are the likes of the Yieldmax ETFs. For instance, the YieldMax Ultra Option Income Strategy ETF ( ULTY ) uses a high-risk portfolio and large amounts of ROC to provide a 117% yield.

In the middle of these two extremes lies the NEOS Bitcoin High Income ETF ( BTCI ). This article highlights how this middle ground could be an ideal balance for income investors.

BTCI Basics BTCI's main aim is to provide high income. It also provides Bitcoin exposure and the potential for capital appreciation.

However, it does not directly hold Bitcoin and employs two alternative methods for exposure. (i) investing in exchange-traded spot Bitcoin ETPs (the “Spot Bitcoin ETPs”) primarily through a controlled foreign corporation and in some cases by directly investing in Bitcoin ETPs (ii) obtaining indirect Bitcoin exposure through ETFs that invest principally in Bitcoin futures contracts (each, a “Bitcoin Futures ETF”), which is obtained by employing an options strategy that consists of selling (writing) put options and buying call options at the same strike price on one or more Bitcoin Futures ETFs Its holdings are therefore slightly complex, with USTs (cash proxy) acting as collateral for its options.

NEOS The holdings also reflect that BTCI sells calls in an options overlay strategy to generate premium (income). This is a common process in income funds and forfeits participation in rallies above the strike price.

Importantly for the sake of ROC, the calls that are exercised above the strike price can be classified as a loss, although the fund does not actually lose on its total holdings, as the underlying exposure to Bitcoin cancels out the loss on calls. As NEOS explains (emphasis mine): If the price of the reference asset is greater than the strike price at the expiration date, the counterparty will exercise their option.

This obligates the writer to sell the reference asset to the counterparty (buyer) at the pre-specified price, which will be at a price below the market price, resulting in a loss for the writer and an equivalent profit for the holder. Funds can choose what they want to do with this "loss.

" Some, like DIVO, primarily use it to reclassify its distributions as ROC for tax purposes, and there is minimal NAV erosion. Some ETFs like ULTY use it to boost distributions, and this leads to significant NAV erosion.

NEOS provides a useful explanation of its use of ROC, Options-based income ETFs from NEOS aim to harness the tax efficiency of return of capital distributions for investors without eroding their underlying principle. Each ETF seeks to fund a portion of its monthly income distributions from sold index option premium, which is converted to capital gains, and then paid out to investors on a monthly basis.

The experienced portfolio management team behind the NEOS ETFs have decades of experience creating and managing options-based ETFs. When possible, they seek to find losses in each ETF’s portfolio that can be used to offset gains, potentially helping a portion of Fund distributions receive a return of capital designation.

BTCI's NAV is therefore fairly steady and does not erode like ULTY. Data by YCharts It does mean the distributions are not as impressive as ULTY, but the annualized figure of last month's distribution is 28.

07%, which is ample, especially paired with the 22. 74% capital gains since inception.

NEOS When Forfeiting Total Return Makes Sense The income versus capital gain is a debate that keeps raging on Seeking Alpha, and it seems many income investors don't mind forfeiting total returns as long as the high income keeps flowing. I understand the perspective—if the only focus is income, then why bother with what the underlying prices are doing?

Well, you should bother a bit. If the NAV keeps eroding, it will lead to lower distributions.

If the NAV falls 50%, the distributions will too. A stable NAV is important.

Also, in some cases, non-participation in rallies can lead to extreme underperformance. If you held the YieldMax PLTR Option Income Strategy ETF ( PLTY ) instead of just Palantir Technologies Inc.

( PLTR ), you would have the same risk exposure and forfeit over +150% for the sake of getting a distribution. Data by YCharts Thankfully, BTCI does not give away too much total return compared to just holding Bitcoin or a proxy ETF like the iShares Bitcoin Trust ETF ( IBIT ).

Data by YCharts BTCI was launched in October 2024 and trails IBIT by around 13%. That's a lot, but it happened mostly when the fund was young and Bitcoin rallied strongly in Q4 2024.

After that, the relative performance has been much better. Data by YCharts In flat to down markets, BTCI may even outperform.

A Word on the Underlying BTCI and other income ETFs have performed well because the underlying instruments have performed well. Since the April lows, risk assets have been up 5 months in a row in one of the strongest rallies of all time.

That won't continue forever, and BTCI prices will drop at some point. The income should remain fairly steady as the premiums should not be affected; indeed, they may rise if volatility rises, but they are not guaranteed.

Conclusions BTCI gets the balance between income and capital gains about right. ROC is used as a tax advantage, not as a way to boost distributions, and the NAV is steady.

It underperforms Bitcoin, but only slightly; it lags IBIT by 1. 76% in the last 6 months.

At the same time, it is paying out an attractive monthly distribution, annualized at 28%. I rate BTCI a "buy.

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