Goldman Sachs’ $2.3 Billion Bet on NEOS ETFs

The recent acquisition of NEOS by Goldman Sachs for $2.3 billion has sent shockwaves through the ETF industry. This move has catapulted the bank into the top ten issuers, with a platform worth approximately $130 billion. The Zoo crew believes that this is a straightforward bet on the growing demand for income and downside protection among retiring baby boomers.

However, the real intrigue lies beneath the surface, where NEOS’s covered-call funds rely heavily on return-of-capital distributions (untaxed, tax-efficient income) via 1256 contracts. This structure is distinct from rivals like JEPI/JEPQ, which raises concerns about the implications of this approach.

The Rise of Options Income ETFs

Options income ETFs are experiencing a parabolic rise, even as the S&P grinds higher and 30-year Treasury yields sit near multi-decade highs. According to Todd Sohn, Chief ETF Strategist at Baird Strategas, these products are quietly stealing market share from traditional dividend ETFs, particularly among younger investors seeking more dynamic portfolios.

This shift is likely driven by the growing recognition of the importance of tax-efficient income in the face of increasing tax rates. As a result, investors are increasingly turning to options income ETFs as a means of generating untaxed returns.

The Disappearing Consumer Sector

A peculiar trend has emerged in the market, where consumer stocks have all but vanished from index influence. Meanwhile, tech (and AI subscriptions) are absorbing the wallet share that once went to staples and discretionary names. This phenomenon is likely linked to the downstream productivity gains generated by AI, which are benefiting equal-weight and small-/mid-cap stocks.

This shift in market influence is a reflection of the broader impact of AI on the economy, as traditional industries are increasingly being disrupted by technological advancements.

Treasury’s Scrutiny of Aggressive ETF Structures

Brent Sullivan, Editor of Tax Alpha Insider, has highlighted the looming reckoning that the Treasury is about to unleash on the ETF industry. The focus is on aggressive structures, including 351 exchanges, box spreads, and dividend-avoidance ETFs. While a timeline for enforcement is uncertain, Sullivan expects the most public and obvious cases to be addressed first.

This development has significant implications for the ETF industry, as issuers will need to reassess their strategies and ensure compliance with upcoming regulations.

A Cautionary Tale of an ETF’s Downfall

A recent example of an ETF’s spectacular failure serves as a reminder of the risks involved in investing in the options income space. A well-known manager’s ETF has plummeted by 96-97% year-to-date, following a bet on short-dated QQQ options. This cautionary tale highlights the importance of approaching options income ETFs with caution and a deep understanding of the underlying risks.