Passive income investors can use exchange traded funds (ETFs) for a variety of benefits. One fund might offer the biggest yield, while another ETF may confer tax advantages.
Right now, I will show you two dividend ETFs that could legitimately be called passive income machines. Which one is “better” depends on your particular objectives as an investor. After weighing the similarities and differences, you might even choose to own shares of both of these high-yield, high-conviction funds.
MSTY: Jaw-Dropping Yield
Sometimes, bigger really is better. YieldMax is known for ETFs with huge yields that passive income investors crave, and one fund will undoubtedly capture your attention.
I’m referring to the YieldMax MSTR Option Income Strategy ETF (NYSEARCA:MSTY), which could make practically any yield hunter’s dreams come true. First things first, though: the MSTY ETF has an expense ratio (i.e., the annual management fees that are automatically deducted from the share price) of 0.99%.
That’s a fairly high expense ratio when compared to many other ETFs. Yet, the YieldMax MSTR Option Income Strategy ETF offers major perks, so you probably won’t mind paying the management fees.
One perk is that the YieldMax MSTR Option Income Strategy ETF uses a complex strategy that most individual investors wouldn’t have the know-how to implement. Specifically, MSTY actively trades U.S. Treasury bonds and options on Microstrategy (NASDAQ:MSTR | MSTR Price Prediction) stock.
If you’re bullish about Microstrategy stock, then you can just let the YieldMax MSTR Option Income Strategy ETF fund managers do all of the heavy lifting. They’ll figure out the logistics of trading government bonds and Microstrategy stock options while you just sit back and collect the cash distributions.
The next perk of the MSTY ETF is that it pays cash distributions each and every month. Consequently, you can reinvest those monthly distributions back into the YieldMax MSTR Option Income Strategy ETF to maximize the effect of compounding.
Additionally, there’s the most obvious perk of MSTY, which is the jaw-dropping distribution rate (i.e., the annualized cash distribution yield on a share-price percentage basis). If you can believe it, the YieldMax MSTR Option Income Strategy ETF features a distribution rate of 94.37%. As long as you have a bullish stance on Microstrategy stock, it may be difficult to resist the MSTY ETF’s income-generating opportunities.
SPYI: Steady, Tax-Efficient Payouts
Granted, you might not be ultra-bullish about Microstrategy stock, which can be volatile. If you’re in the market for a more “steady Eddie” income-focused fund, I invite you to check out the NEOS S&P 500 High Income ETF (BATS:SPYI).
As we’ll discover, the SPYI ETF doesn’t offer the “insane” annual yield that the YieldMax MSTR Option Income Strategy ETF does. However, you’ll get much more diversification with the NEOS S&P 500 High Income ETF as this fund includes approximately 500 stocks in its holdings.
Because SPYI is based on the S&P 500 stock index, you’ll probably experience less volatility than you would with MSTY. From Apple (NASDAQ:AAPL) to Coca-Cola (NYSE:KO), Home Depot (NYSE:HD) to Bank of America (NYSE:BAC) and many more, you’ll get exposure to a wide variety of well-established firms with the NEOS S&P 500 High Income ETF.
Since the fund invests in reliable businesses, investors can expect consistent cash payments from the SPYI ETF. Moreover, like the YieldMax MSTR Option Income Strategy ETF, the NEOS S&P 500 High Income ETF pays out its distributions on a monthly basis.
Another benefit is SPYI’s 0.68% expense ratio, which is less than MSTY’s 0.99% expense ratio. But then, the NEOS S&P 500 High Income ETF’s 12.5% distribution rate is much lower than the YieldMax MSTR Option Income Strategy ETF’s massive 94.37% distribution rate.
Then, there are potential tax advantages associated with the SPYI ETF. The fund’s prospectus observes, “Taxes on distributions of capital gains (if any) are determined by how long the Fund owned the investments that generated them, rather than how long a shareholder has owned his or her Shares.”
In other words, even if you hold the NEOS S&P 500 High Income ETF for less than a year, the cash distributions may still count as long-term capital gains. This could result in a lower tax rate on those distributions (please consult a qualified tax professional for recommendations on tax strategies).
The bottom line is that both funds feature monthly income opportunities, but the NEOS S&P 500 High Income ETF may be more tax-advantages and less volatile with a lower expense ratio. That said, it’s hard to resist the gigantic annual yield of the the YieldMax MSTR Option Income Strategy ETF. In the end, you may choose to allocate carefully into both of these ETFs for an optimal, balanced yield-bearing impact on your portfolio.
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