The 12% Yield Monthly Income ETF I’d Rather Own in a Taxable Brokerage Account

Return of capital (ROC) sounds like an investment fund simply handing your own money back to you, but that’s not necessarily what is happening economically. For tax purposes, a distribution classified as ROC generally isn’t taxed when received. Instead, it reduces your adjusted cost basis.

If you invest $100,000 and subsequently receive $10,000 classified as ROC, for example, your cost basis generally falls to $90,000. That effectively defers the tax until you sell, at which point the lower basis can result in a larger capital gain. Once your basis reaches zero, additional ROC distributions are generally treated as capital gains.

That’s why I think ROC can be particularly useful for investors who actually need portfolio income and hold the investment in a taxable brokerage account. The NEOS S&P 500 High Income ETF (SPYI) is one ETF where that structure has been particularly interesting.

Why SPYI Stands Out

SPYI owns an S&P 500 stock portfolio and supplements it with an actively managed options strategy. Rather than simply writing  covered calls, the ETF can use call spreads, selling calls to generate premium while purchasing higher-strike calls that can restore some participation if the markets rise enough. The ETF charges a 0.68% management fee and currently has a distribution rate of  12%.

The trade-off is upside. Since inception, SPYI has produced a cumulative total return of 75.14%, compared with 57.92% for the Cboe S&P 500 BuyWrite Monthly Index and 101.83% for the S&P 500. That’s actually a result I find fairly compelling for an income strategy. SPYI has substantially outperformed a traditional buy-write benchmark while still trailing the uncapped S&P 500, which is what I’d expect from a strategy deliberately exchanging some upside for current cash flow.

Where things get interesting is taxation. SPYI’s August distribution was $0.5237 per share, and its Section 19a-1 notice estimated that approximately 97% consisted of ROC, with the remaining 3% classified as net investment income. Those figures are preliminary estimates rather than final tax classifications. Investors need to look to their Form 1099-DIV for the final characterization.

Why I’d Specifically Hold SPYI in a Taxable Account

For me, the most compelling use case for SPYI is an older retiree who has entered decumulation, actually spends the distributions, and intends to leave appreciated investments to heirs.

Imagine a retiree buys $1,00,000 of SPYI in a taxable brokerage account. Over many years, ROC distributions help fund retirement spending while gradually reducing the investor’s cost basis. Suppose the basis eventually falls to $800,000 while the shares are still worth $1,000,000 when the investor dies.

Under current federal tax rules, inherited property generally receives a new cost basis equal to its fair market value at the owner’s death. If the heir’s basis were stepped up to $1,000,000 in this example, much of the unrealized capital gain created by the retiree’s reduced basis could effectively disappear for income-tax purposes.

However, several things need to hold for the strategy to work as intended. SPYI needs to generate enough total return to support its distributions without persistent NAV erosion. A meaningful portion of its distributions needs to continue receiving ROC treatment. The investor needs to hold the shares rather than sell them and realize the deferred gain. The shares need to remain appreciated at death, and current step-up-in-basis rules need to remain in place. Individual estate and tax circumstances can also change the outcome.

This is also why I specifically prefer SPYI in a taxable brokerage account for this use case. Inside an IRA, the ROC cost-basis deferral doesn’t provide the same advantage because the account already has its own tax treatment. For a retiree spending distributions from taxable assets and potentially holding those shares for life, however, SPYI’s combination of a roughly 12% distribution rate, ROC-heavy estimated distributions, and equity exposure makes the tax mechanics much more useful.

The main thing I’d watch is total return. A 12% distribution isn’t economically valuable if the fund continually destroys enough NAV to offset it. So far, SPYI’s positive cumulative performance while paying substantial distributions suggests its ROC has been more constructive than destructive, but that needs to be monitored rather than assumed indefinitely.

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