Summary BTCI employs a covered call strategy, buying Bitcoin via VanEck's Bitcoin ETF and selling Bitcoin futures to generate income, limiting upside but providing steady returns. The fund's performance trails Bitcoin and MAXI, but aligns closely with YBTC, indicating typical underperformance of covered call funds in volatile or bull markets. BTCI's use of Bitcoin futures offers capital efficiency, maintaining significant upside potential, which can be seen in its comparison to YBTC. Distributions made by BTCI are largely tax-efficient, and this article discusses why it is suitable for taxable brokerage accounts despite its high income. Introduction In my quest to build the perfect portfolio, I've stumbled across quite a few Bitcoin ( BTC-USD ) funds, in particular those that trade options on top of Bitcoin holdings. Most recently, I've reviewed Simplify's MAXI and Roundhill's YBTC . In both reviews, I received the same question from readers: What about the NEOS Bitcoin High Income ETF (BATS: BTCI )? Okay, they don't write the name out like that, but it's all the same. The people want to know if BTCI is worth its salt, especially after I gave green lights to both MAXI and YBTC. Let's take a look at BTCI to see how it stacks up. The fund's investment strategy is fairly straightforward. Like most covered call funds, it buys its reference asset and then systematically sells call options against that long position. This limits the upside of the asset, but provides income. More on that later. We can see how much of BTCI's returns are made through this income by comparing its price returns and total return, which includes dividends paid but not reinvested. Data by YCharts The fund has kept up with Bitcoin over time, although its underperformance to the asset itself is to be expected, as the income produced by BTCI is a direct result of the capped upside. That doesn't make it a bad investment, especially for those that are wanting to use the income and are willing to pay the difference in total return in order to have the income hit their account each month without their intervention or timing of selling shares. Data by YCharts BTCI Strategy Covered call strategies are fairly straightforward, given how complex options strategies can get. The fund buys Bitcoin, which it owns via VanEck's HODL ETF, and then sells Bitcoin futures contracts to generate income. Futures are settled in cash, so the fund doesn't have to sell its Bitcoin if the strike on the call option is breached; they just pay the losses in cash. This is part of why NAV may decline even as Bitcoin rises, and one of the reasons to focus on total return. When looking at BTCI's holdings, we see that it owns HODL as only part of its long exposure. The fund also owns long Bitcoin futures, which act as a source of capital efficiency for the fund. This is because futures often give investors more exposure than they pay for, i.e., leverage. This allows the fund to own less than 25% of its NAV in HODL and less than 10% of its NAV in long Bitcoin futures, and still maintain an upside target of nearly 80% for Bitcoin. Note that the short put, is a long position as well. Combined with the long call, it produces a "synthetic" position in Bitcoin, which functions with the same PnL of being long the asset itself. NEOS This combination of assets, and the use of capital-efficient leverage like futures, allows the fund to also hold over 70% of its NAV in T-Bills, which is effectively a cash position. BTCI Performance Against Peers When looking at all three of the funds I've covered up against each other, and against uncovered Bitcoin (measured by IBIT ), limited by BTCI's history as it's the newest fund, we see an interesting pattern emerge. While MAXI has been far more volatile than the other funds, due to its equities-based options overlay, it has actually exceeded Bitcoin's return over this timeframe (which is fairly arbitrary, for the record), while BTCI and YBTC trail behind it. This is par for the course, and we should expect underperformance against the reference asset, Bitcoin, over the long run. Such is par for the course with covered call funds, which will only outperform in sideways markets, and even then, they may still underperform depending on how volatile the asset is. In bull markets, these funds limit their upside exposure with the covered calls and pad their downsides with the income generated from a total return perspective. Data by YCharts MAXI is a bit unfair as a comparison, because it does not cap the upside of Bitcoin, and instead gets its income from its equities and commodities options trading. YBTC is a far closer comparison to BTCI's strategy, given they both directly cap the upside of Bitcoin. BTCI Dividends & Taxes Now, we can get to the main course, the reason most folks are reading this article (I imagine, I suppose I could be wrong on this one): the income. Data by YCharts Its dividend is fairly variable, and really depends on the trading done by management. Expect it to be inconsistent moving forward, as it has been in the past. BTCI doesn't offer the mammoth 55% yield that YBTC does, clocking itself in at a distribution rate of 27%. However, it has outperformed YBTC in total return over its lifespan, which is a great reminder that a higher yield doesn't always mean better results. NEOS Note that I used "distribution rate" and not the 30-day SEC yield, which is at a far, far lower 2%. This is because the distributions that BTCI makes are not primarily net investment income ("NII") or "ordinary income," such as the interest from treasuries (where that 2% comes from to begin with). Instead, as per the IRS rule Section 1256, futures gains are taxed as capital gains. As per Cornell Law School : ... any gain or loss with respect to [futures] shall be treated as... ( A ) short-term capital gain or loss, to the extent of 40 percent of such gain or loss, and ( B ) long-term capital gain or loss, to the extent of 60 percent of such gain or loss, and Because of this rule, distributions made from futures gains inside an ETF are classified as return-of-capital ("RoC"). When looking at BTCI's 19a-1 forms , where the tax classifications for distributions are initially declared (although subject to some later revision, potentially), we see that the vast majority of their distributions are made this way. Here is the latest 19a-1 form from the April distribution: NEOS RoC isn't a bad thing, necessarily. As mentioned earlier, it is an accounting gimmick, more or less. It changes how your taxes are paid. Distributions that include RoC are counted against the cost-basis of your shares, and only create a taxable event when you sell those shares. This means that the income is tax-deferred until the sale of the shares, or until your cost-basis becomes zero. If you get to zero on your cost-basis, new RoC distributions would be considered long-term capital gains, according to this IRS publication . A nondividend distribution reduces the basis of your stock. It is not taxed until your basis in the stock is fully recovered. This nontaxable portion also is called a return of capital; it is a return of your investment in the stock of the company. If you buy stock in a corporation in different lots at different times, and you cannot definitely identify the shares subject to the nondividend distribution, reduce the basis of your earliest purchases first. When the basis of your stock has been reduced to zero, report any additional nondividend distribution you receive as a capital gain. Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock... Example 1. You bought stock in 2010 for $100. In 2013, you received a nondividend distribution of $80. You did not include this amount in your income, but you reduced the basis of your stock to $20. You received a nondividend distribution of $30 in 2023. The first $20 of this amount reduced your basis to zero. You report the other $10 as a long-term capital gain for 2023. You must report as a long-term capital gain any nondividend distribution you receive on this stock in later years. This makes BTCI suitable for taxable brokerage accounts, because its primary income is delivered in this tax-efficient form, which can be cashed in as capital gains at the discretion of the investor (provided your cost basis isn't zero), instead of in the year they are received. Meanwhile, the cash still hits your account and is liquid, despite the taxes on it being put off indefinitely. Suitability Investors need to very carefully consider an allocation to BTCI, as it is a very risky asset to hold long. Bitcoin could plummet, and despite the income generated by the fund, BTCI will get all the same downside. The loss may even be accelerated by the fund's synthetic futures position, which could act against an investor in a sudden crash of the underlying asset. Aggressive investors could consider up to a 3% allocation to BTCI, but should be aware that it is very volatile and only useful for speculation. If an investor has other cryptocurrency exposure, they are advised to lower that allocation to 2% or under. Moderate investors could consider up to a 1% allocation to the fund, and should be aware that they are on the cusp of being intolerable of the kind of risk that cryptocurrency brings to a portfolio. Capping the upside to produce income is a solid strategy for these folks, but the downside they could see if still hefty. Conservative investors should not only avoid BTCI entirely, but Bitcoin itself too. Cryptocurrencies, and funds that sell options against them, are unsuitable for conservative investors entirely. Those investors looking for high volatility income are likely better off with risk-on equities income funds like J PMorgan's JEPQ . Conclusion I am a fan of tax-efficient income funds like the NEOS Bitcoin High Income ETF ( BTCI ) because of its ability to capture some of the upside in Bitcoin, but also provide a tax-efficient way to access the income from its volatility. Of course, risks around underperforming uncapped Bitcoin and still receiving all the downside (less the income received) are worth pausing and considering your own risk tolerance. While the fund receives a buy from me, this is because I see it is a better option than Roundhill's YBTC, which distributes a much higher amount and in return has offered a lower total return, since it misses out on too much of Bitcoin's upside. That being said, my favorite Bitcoin fund is still Simplify's MAXI , as it produces similar amounts of income to BTCI without directly capping the upside of its Bitcoin exposure. That fund is riskier than BTCI, but folks interested in Bitcoin covered call funds are likely to have the risk tolerance for either fund, and could consider even holding both if they have the portfolio space for speculative positions like cryptocurrency. The most important thing to remember is a phrase I've been leaving at the end of a lot of my articles recently, mostly because I think folks need to keep hearing it: Position sizing is often more important than security selection. Thanks for reading. (3) any gain or loss with respect to a section 1256 contract shall be treated as— ( A ) short-term capital gain or loss, to the extent of 40 percent of such gain or loss, and ( B ) long-term capital gain or loss, to the extent of 60 percent of such gain or loss, and
