Summary NEOS Bitcoin High Income ETF offers direct Bitcoin exposure with an option-writing strategy to generate high monthly income, currently yielding about 28.3%. BTCI is best suited for investors seeking to harness Bitcoin's volatility for income, rather than those aiming for maximum upside from BTC appreciation. BTCI's performance will likely lag Bitcoin in strong rallies but can outperform during choppy or flat markets due to steady payouts from its options strategy. Accumulating BTCI during Bitcoin weakness may be attractive, especially for income-focused investors, but risks remain if Bitcoin declines further and payouts decrease. Overview Now that Bitcoin has pulled back from its all-time highs, I believe that it makes sense to build positions in ETFs that can benefit from the increased volatility and uncertainty. The NEOS Bitcoin High Income ETF ( BTCI ) provides direct exposure to Bitcoin while implementing an option writing strategy to amplify the income levels. While this fund isn't the best way to participate in the upside of Bitcoin, it may be the best way to harness the current volatility and turn this into monthly income. The fund has an inception dating back to October of 2024, so be aware that BTCI hasn't been time-tested. Looking at the performance over the last twelve months, we can see that BTCI's share price has fallen by 26.76%. However, this decline is mostly attributed to Bitcoin's recent pullback. When including all distributions paid out to shareholders, the total return still sits at a loss of 4.77% over the same time frame. BTCI now offers investors a starting dividend yield of about 28.3% and issues payouts on a monthly basis, which makes it an enticing choice for income investors that are also bullish on Bitcoin. Data by YCharts The high starting dividend yield makes it possible for investors to reach house money status by remaining patient over a longer holding period. Although the fund offers a high dividend yield, there are some clear risks that should be considered. For instance, Bitcoin could still see further declines that can cause the payouts to decrease over time. So timing is very important when it comes to Bitcoin-related funds like BTCI. Let's start by taking a look at the underlying strategy that BTCI implements to generate its income. Fund Strategy According to the fund's overview , BTCI has total net assets of $823.7M and also has a gross expense ratio of 0.98%. The fund's primary goal is to generate a high current income while also participating in the growth of Bitcoin from its direct exposure. In order to achieve this goal, BTCI writes call options on Bitcoin futures ETFs and uses the option premiums to fuel the payouts. The fund is actively managed by NEOS so that the fund can utilize a data-driven option strategy, which is meant to be more efficient than if investors tried to write these options themselves. Unlike some of the higher-yielding Bitcoin ETF peers, BTCI actually has direct exposure to Bitcoin. Instead of holding Bitcoin directly, the fund's holdings consist of exposure to the VanEck Bitcoin ETF ( HODL ) and the iShares Bitcoin Trust ETF ( IBIT ), which both directly hold Bitcoin. We can also see that BTCI is backed by US Treasuries. Most of the listed call options below are dated with expiry dates that are about a month or two out. NEOS Funds The fund utilizes OTM (out-of-the-money) options, which can allow BTCI to capture upside price movements since the selected strike price is above the current market price of the asset. As laid out by the prospectus , the fund also utilizes a bear call spread strategy when management believes the price of Bitcoin will decline. This can help offset the downside movements over time. The Fund’s options income strategy may also consist of a bear call spread strategy when the Adviser believes Bitcoin’s price will decrease, remain unchanged, or only increase slightly. In a bear call option spread, the Fund writes an out of the money call option on a Bitcoin-related instrument while also purchasing a call option on the Bitcoin-related instrument that is further out-of-the-money. A call option is “out-of-the money” if the underlying price of the Bitcoin-related instrument is less than the strike price of the option. Despite the OTM strategy, BTCI's growth is still limited. Therefore, I want to emphasize that if you're bullish about the outlook of Bitcoin, you'd be better off directly owning that asset. BTCI should only be utilized by investors looking to harness the current volatility of the market and generate income. I believe that BTCI makes the most sense as an accompanying position alongside Bitcoin. Performance Risks Despite the fund's exposure to ETFs that hold Bitcoin, BTCI is likely to underperform over the long term. Just to demonstrate the weakness, BTCI's share price has declined by about 6.27% since its inception. When including all distributions paid out to shareholders, the total return jumps up to 27.58% over the same time frame. Therefore, investors should anticipate that most of the returns will come from the fund's ability to continue paying out a high rate of distributions over time. Data by YCharts After measuring the performance of BTCI for some time, I believe that there is a simplified way to understand how the fund is likely to perform through different market cycles. BTCI is best utilized during a period of choppy market movements, whereas BTCI is very likely to underperform during strong market rallies due to the limitations from its option strategy. Here are three scenarios of how BTCI is likely to perform: Bitcoin Is Trending Higher = BTCI is likely to see minor capital appreciation, and payouts may increase. However, BTCI will typically underperform Bitcoin since its growth is capped. Bitcoin Is Choppy/Flat = BTCI is likely to outperform Bitcoin since payouts will remain steady and the share price will not suffer from declines. Bitcoin Is Declining = BTCI is likely to underperform. The price is likely to suffer from declines since it still needs to pay out large distributions. However, these payouts may offset declines, depending on how steep they are. So despite BTCI's returns following the overall trend of Bitcoin, as we can see below, the fund is still likely to underperform over the long term. Additionally, it's entirely possible that Bitcoin hasn't found its bottom yet. Therefore, I plan to initiate a position with a very small amount of capital at first. Data by YCharts Dividend Utility As of the latest declared monthly distribution of $1.2990 per share, the current dividend yield sits around 28.3%. However, the actual payout amounts will vary month to month due to the success of the option writing, momentum of Bitcoin, and the implied volatility levels. Therefore, BTCI may not be a great choice for investors seeking consistent payouts on a monthly basis. Despite this vulnerability, BTCI has done a great job at keeping payouts within a tight range so far. However, BTCI's consistent range should not be an indication of its ability to keep payouts consistent in the future. I remain cautious about a scenario where Bitcoin declines further. As the fund's net assets decline, the payouts will also need to decline, which we can already see happening over the last two months. Bitcoin goes through different cycles and if the post-halving cycle is coming to an end, Bitcoin's price may continue to decline in the near term. Seeking Alpha However, the large distributions can help offset mediocre Bitcoin performance if the positive momentum is cooling. The large yield also makes it possible for investors to achieve house money status, which is the point where the investors receive their initial investment back in distributions. With an annual yield as large as this, it's technically possible to reach house money status back within approximately 3.5 years. For example: $10,000 invested = ~$2,830 in annual income. $2,830 X 3.54 years = $10,018 in total income. Additionally, the fund seems to prioritize tax-efficient distributions. For instance, the latest section19(a) notice indicates that 93% of the distributions paid YTD have been funded by return of capital. Unlike net investment income, return of capital distributions aren't classified as income and therefore, aren't taxed as such. Instead, return of capital distributions reduce an investor's cost basis and allow taxes to be deferred until the time of sale. However, this doesn't mean that there are no tax consequences for investors. Since a small portion of payouts are fueled by net investment income, there will still be some tax impact investors should consider if utilizing BTCI outside of tax-advantaged accounts. BTCI Section19(a) Notice Takeaway In conclusion, I believe that it may be a solid time to accumulate shares of BTCI on the current Bitcoin weakness. Now that Bitcoin has fallen from its all-time highs, it makes sense to maintain exposure to an income ETF that can harness the volatility and uncertainty by turning it into income. Additionally, the fund seems to prioritize making its high distributions using tax-efficient methods, such as return of capital.
