The NEOS Real Estate High Income ETF (IYRI) provides investors with exposure to the real estate sector and a double-digit monthly dividend yield. This fund aims to offer tax-efficient income, making it attractive for various investment accounts. Since its launch in January 2025, IYRI has drawn attention from income-focused investors looking for alternatives to traditional property ownership.
Key Takeaways
- IYRI offers a double-digit monthly dividend yield of 11.17%.
- The fund uses a covered call strategy to generate high distributions.
- Most distributions are classified as return of capital, offering tax efficiency.
- IYRI's portfolio includes both equity REITs and some mortgage REITs.
- The ETF has shown positive total returns since inception despite price fluctuations.
Understanding IYRI's Investment Approach
The NEOS Real Estate High Income ETF (IYRI) combines real estate exposure with an income-generating strategy. It primarily invests in Real Estate Investment Trusts (REITs) and employs a covered call strategy. This approach allows the fund to generate significant monthly distributions for its shareholders.
REITs are companies that own, operate, or finance income-producing real estate. They are required by law to distribute at least 90% of their taxable income to shareholders annually. This structure makes REITs inherently attractive to investors seeking regular income. IYRI enhances this income potential through its options strategy.
Fund Snapshot
- Inception Date: January 14, 2025
- Current Distribution Yield: 11.17%
- Distribution Frequency: Monthly
- Top Holdings: Simon Property Group (SPG), American Tower (AMT), Realty Income (O), Prologis (PLD), Welltower (WELL), Equinix (EQIX), Digital Realty Trust (DLR).
Covered Call Strategy and Income Generation
A core element of IYRI's strategy is its use of covered calls. This options strategy involves holding a long position in an asset and simultaneously selling call options on that same asset. The sale of these call options generates premium income, which is then distributed to investors. This method aims to boost the fund's overall yield.
While covered call strategies can provide high income, they may also limit upside potential if the underlying assets experience significant price appreciation. However, for investors primarily focused on consistent income, this trade-off can be acceptable. NEOS has become known for its range of covered call ETFs, with IYRI being a notable entry in the real estate sector.
Tax Advantages of IYRI's Distributions
One of the key benefits highlighted for IYRI is its tax-efficient income structure. A significant portion of the fund's distributions typically comes as a return of capital (ROC). This differs from the ordinary income distributions paid by many individual REITs.
Return of capital distributions are generally not taxed in the year they are received. Instead, they reduce the investor's cost basis in the fund. Taxes are deferred until the shares are sold, or the cost basis reaches zero. When taxes are eventually paid, they are often at the more favorable long-term capital gains rate, assuming the investment has been held for more than one year.
"IYRI's return of capital distributions are a significant advantage," states one financial analyst. "They allow investors to defer taxes and potentially pay a lower rate later, making the fund appealing for both taxable and retirement accounts."
Understanding Return of Capital
Return of capital (ROC) refers to a distribution that is not considered taxable income by the IRS in the year it is paid. Instead, it reduces the investor's cost basis in the investment. For example, if an investor buys shares at $50 and receives a $5 ROC distribution, their cost basis becomes $45. This deferral of taxes makes ROC distributions attractive for long-term holders.
This tax treatment makes IYRI attractive to a broad range of investors. Younger investors can benefit from tax deferral in taxable accounts, while older investors can still enjoy the benefits even outside of tax-advantaged retirement accounts like Roth IRAs, which are typically preferred for ordinary income-generating REITs.
Performance and Market Context
Since its inception in January 2025, IYRI has navigated a challenging market environment for real estate. The sector has faced headwinds from rising interest rates over the past three years. Despite these challenges, IYRI has demonstrated resilience in its total return.
Year-to-date, IYRI's share price has seen some fluctuations. However, when considering total returns, which include its substantial distributions, the fund has performed positively. According to recent data, IYRI has achieved a total return of over 6% since its launch.
Comparison to Traditional REIT ETFs
When compared to broader real estate ETFs, such as The Real Estate Select Sector SPDR Fund ETF (XLRE) and Vanguard Real Estate Index Fund ETF Shares (VNQ), IYRI's price performance year-to-date has lagged. However, its significantly higher distribution yield has contributed to its outperformance in total returns.
Both XLRE and VNQ typically offer yields below 4% and pay distributions quarterly. In contrast, IYRI's 11.17% monthly yield provides a more consistent and substantial income stream. This higher yield has effectively offset any short-term underperformance in capital appreciation.
Interest Rate Impact
Real Estate Investment Trusts (REITs) are often sensitive to interest rate changes. Higher rates can increase borrowing costs for real estate companies and make their dividends less attractive compared to fixed-income alternatives. Conversely, declining interest rates can act as a catalyst for REIT performance, potentially leading to stronger price appreciation.
Looking ahead, a potential catalyst for IYRI and the broader REIT sector could be a decline in interest rates. Experts anticipate interest rates may continue to decrease through the next year. This scenario could lead to stronger price appreciation for REITs. While IYRI's options strategy might temper some capital appreciation compared to a pure equity REIT fund, it is still expected to benefit from a more favorable interest rate environment.
Considerations for Investors
While IYRI offers attractive features, investors should be aware of certain aspects. The fund's portfolio includes a mix of equity REITs and some mortgage REITs (mREITs). Mortgage REITs, such as Annaly Capital Management (NLY), AGNC Investment Corp. (AGNC), and Starwood Property Trust (STWD), are generally considered riskier, especially during periods of economic uncertainty or interest rate volatility.
mREITs typically invest in mortgages and mortgage-backed securities, making them sensitive to interest rate fluctuations and credit market conditions. While they are known for their higher yields, which contribute to IYRI's overall distribution, their inclusion introduces an element of risk that some investors prefer to avoid.
However, IYRI's diversified portfolio, predominantly composed of equity REITs, aims to mitigate this risk. The fund's consistent monthly distributions and its ability to maintain net asset value (NAV) growth are positive indicators. Many covered call funds can experience NAV erosion over time, where high distributions are offset by a decline in the fund's underlying value. IYRI's demonstrated NAV growth suggests a more sustainable income model.
For long-term investors, NAV growth is crucial for preserving capital and ensuring the sustainability of income distributions. The fund's performance in this area is a key factor for those considering a long-term holding strategy.
Conclusion
The NEOS Real Estate High Income ETF (IYRI) presents a unique opportunity for investors seeking real estate exposure with a high, tax-efficient income stream. Its covered call strategy generates a double-digit monthly yield, and its return of capital distributions offer tax advantages.
While the inclusion of mortgage REITs introduces some risk, the fund's diversified holdings and historical NAV growth support its long-term income potential. As interest rates are expected to decline, IYRI could see further benefits, offering a compelling option for income-focused investors looking to capitalize on the real estate sector's tailwinds.
