MSTY vs. SPYI: Yield or Tax Efficiency — What’s the Better Income Bet?

The universe of exchange traded funds (ETFs) runs the gamut from high-risk to super-stable. On the riskier end of the spectrum is the YieldMax MSTR Option Income Strategy ETF (NYSEARCA:MSTY). Meanwhile, the NEOS S&P 500 High Income ETF (BATS:SPYI) is more of a “steady Eddie” type of fund with potential tax advantages.

Most Americans feel that they’re already paying too much in taxes, so perhaps the SPYI ETF can ease that burden a little bit. Yet, it may be hard to resist the sky-high yield offered by the MSTY ETF. After discovering the different benefits of these two fascinating funds, you might consider adding one or even both of them to your portfolio.

MSTR: A Mega-Yield Crypto Play

First, we’ll start off with an analysis of YieldMax’s MSTR Option Income Strategy ETF. As you probably figured out, this ETF is based on Strategy (NASDAQ:MSTR) stock.

If you’re planning to own MSTY, you should have an optimistic outlook on Bitcoin (CRYPTO:BTC). That’s because Strategy holds more than 600,000 Bitcoins and that number keeps growing.

Don’t assume that the YieldMax MSTR Option Income Strategy ETF directly holds MSTR stock shares. YieldMax directly acknowledges that the MSTY ETF “does not invest directly in MSTR.”

Instead, the fund may use synthetic option strategies to approximate ownership of MSTR stock shares. Furthermore, the YieldMax MSTR Option Income Strategy ETF may sell covered call options to generate income.

These sophisticated option-trading strategies can enable huge yields and frequent payouts for passive income investors. Amazingly, the MSTY ETF advertises an annual distribution rate of 86.54% and it provides cash payouts on a monthly basis.

The Downsides of MSTY

With such a high expected distribution rate, the MSTY ETF might seem irresistible. However, there are downsides to this YieldMax fund.

For one thing, the fund automatically deducts 0.99% worth of annualized operating expenses from the share price. Furthermore, the MSTY share price can have limited upside, and could even decline sharply, due to the fund’s covered call selling strategies.

Even while the YieldMax MSTR Option Income Strategy ETF’s investors collected sizable monthly cash payouts, they were also subjected to share-price drawdowns. Over the past 12 months, the MSTY ETF’s share price declined by 43.49%.

In addition, the YieldMax MSTR Option Income Strategy ETF doesn’t appear to be highly tax-advantaged. The fund’s prospectus explains that the MSTY ETF’s “distributions are generally taxable as ordinary income, qualified dividend income, or capital gains (or a combination).”

This may be circumvented through a tax-advantaged account such as an Individual Retirement Account (IRA). But then, this is true for many ETFs and generally speaking, the YieldMax MSTR Option Income Strategy ETF’s cash distributions don’t seem to get any special tax treatment.

SPYI: Moderate Yield but Less Downside Risk

In contrast to MSTY’s gigantic expected yield, the yield of the NEOS S&P 500 High Income ETF isn’t quite as jaw-dropping. A fund that extracts yield from the S&P 500, SPYI currently advertises an expected distribution rate of 12.19%.

That’s still a good yield, you must admit. Besides, if you don’t want the risks that come with indirect Bitcoin-market exposure (like you’d get with MSTY), then SPYI could be a better choice for you.

You’ll also get broader diversification with he NEOS S&P 500 High Income ETF. That’s because the fund invests in hundreds of large-cap stocks that you’ll find in the S&P 500, as opposed to the MSTY ETF’s heavy focus on MSTR stock.

Like the YieldMax MSTR Option Income Strategy ETF, the SPYI ETF used covered call selling strategies to generate income. Another similarity is that both of these ETFs provide cash distributions on a monthly basis.

A difference, however, is that the NEOS S&P 500 High Income ETF only deducts 0.68% worth of annualized operating expenses. Again, the YieldMax MSTR Option Income Strategy ETF deducts 0.99%.

Moreover, the SPYI appears to be less susceptible to sharp share-price downside risk. During the past year, the NEOS S&P 500 High Income ETF’s share price has increased by 1.7%; that’s a much better performance than what happened to MSTY’s share price.

Different Tax Treatment for SPYI

Finally, we should recall that the YieldMax MSTR Option Income Strategy ETF doesn’t appear to offer a superior tax treatment to many other ETFs. As for SPYI, its utilizes “SPX Index options,” which are “classified as section 1256 contracts” and “are subject to lower 60/40 tax rates” (according to NEOS; be sure to consult a tax professional to confirm any tax-related statements).

Not only that, but NEOS explains that its NEOS S&P 500 High Income ETF pays out distributions that are classified as return of capital. Consequently, the SPYI ETF’s distributions (according to NEOS) are “not considered income,” are “not immediately taxable,” and reduce the “investor’s cost basis in the ETF.”

NEOS concludes that the SPYI ETF’s return of capital “can help lower an investor’s current tax liability.” You’ll have to determine whether this applies to your tax situation, but there certainly may be an advantage here for holders of the NEOS S&P 500 High Income ETF.

As the old saying goes, it’s different strokes for different folks. If you’re a risk-tolerant Bitcoin enthusiast in search of huge cash payouts, you’ll most likely feel that MSTY is the better pick. If you’re in the market for possible tax advantages and less share-price downside risks, though, then your better choice will probably be SPYI.