⭐ CSHI: A Great Cash Alternative

👉 Happy Friday!

Today we’re sharing another options-based, income-focused ETF: CSHI.

⚡️ Introduction:

I get asked questions every single day from you all about passive income ETF options. NEOS has been my go-to, and you may recall some of these previous breakdowns:

• 💰QQQI: The Covered Call ETF You’ve Been Looking For

• ⭐ QQQI: Additional Analysis

• ⭐ SPYI: Another Rockstar Covered Call ETF

Our friend, Nicholas Bratto, wrote another great overview about CSHI — the NEOS Enhanced Income 1-3 Month T-Bill ETF

We’re thrilled to share his work (with his permission), and he’s also got his very own newsletter that you can check out here.

As a disclaimer, the following analysis was conducted by Nicholas and the writing is in his own words. As always, none of this should be construed as financial advice. Also keep in mind that the charts here are from when he posted this piece last week.

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As always — feel free to comment below or respond to this email with any questions!

Summary

• CSHI has outperformed T-bills and HYSAs by over 1.3% higher returns through integrating a strategic put spread options strategy.

• While CSHI's yield is taxed as ordinary income rates, its effective return still outperforms BOXX and HYSAs after taxes.

• CSHI provides consistent monthly income distributions and better liquidity over BOXX, making it a more attractive short-term cash management solution despite potential rate cuts affecting future yields.

Treasury Bills (T-bills) and High Yield Savings Accounts (HYSAs) have been all the buzz the last few years since the Fed started hiking rates in March 2022. You've probably heard finance gurus and your family members say, "Why would I invest or pay off debt when I can get 4% or 5% risk-free with T-bills or my HYSA!" Well, there does exist another low-risk investment option they may not have heard of that can do at least 1 point better: the Neos Enhanced Income Cash Alternative ETF (CSHI). There's also bigger funds like the Alpha Architect 1-3 Month Box ETF (BOXX) which get mixed into the world of T-bill-like investment options. While both funds have similar cash management goals, they differ on strategy, performance, and tax implications, making CSHI a more comfortable choice as a short-term cash management investment in my opinion.

Fund Strategies

Both CSHI and BOXX are actively managed funds attempting to replicate 1-3 month T-bill returns and generate additional income, deploying an options strategy on the SPX index. Funds like these are meant to generate returns on an investors cash, which is not invested in the broader equity market. CSHI was incepted August 2022 while BOXX followed shortly after in December 2022. I found it intriguing despite a similar inception timeframe, BOXX has a significantly higher AUM at $3.5B vs. $456M for CSHI, yet the strategy of BOXX is more sophisticated and does not return money back to shareholders in the form of monthly distributions like CSHI as do other traditional cash investments like money market, high yield savings, and certificate of deposit accounts.

Risk Profiles

The main difference between these two fund's strategies comes down to the options strategy and distribution policy.

CSHI uses a put spread options strategy on the SPX index to generate additional income on top of the T-bill returns

A put spread, specifically a bull put spread, is when a trader buys a put option at a particular strike price and sells a put option for a higher strike that have the same expiration date. You make money on a bull put spread by collecting a net premium from selling a put with a higher strike price and define your maximum loss by buying a put at the lower strike price. You keep the premium, if the underlying price stays the same or moves up.

BOXX uses a different strategy, called a "Box spread". The ETF owing its name to the strategy, a box spread

Box spreads are generally extremely low risk and the spreads utilized by BOXX offer risk-free returns as they trade indexed European-style options, not American-style, which can be exercised early. Put spreads have a defined risk. Though for CSHI the risk is likely very low given the yield is only about 1% higher annually in addition to the current 5.23% T-bill yield. Neither of these funds are FDIC insured like a HYSA. While the current TTM yield for CSHI is 6.07%, BOXX does not pay a dividend, so we will need to look at the performance of both funds to get a better idea.

Performance Comparison

Since BOXX's inception on December 28th, 2022, CSHI has outperformed BOXX in total return by 1.37% over a year and a half time span. In terms of price return, since BOXX does not distribute a dividend and reinvests into the NAV, we see its performance is pretty much the same as the total return while CSHI's is generally flat. The price return seems to fluctuate slightly negative to zero back and forth, but has hovered around $50/share. In both cases, this is just a reflection of the fund strategy and NAV retention. The yield CSHI reports though and the fact the share price remains stable makes it easier for investors to predict annual returns and gives it more of a traditional cash investment feel.

I find a total return difference of 1% significant for cash management strategies vs. inter-competing dividend growth or growth funds, which have inherently more volatility and risk. When investors look at HYSAs, even a 0.5% difference can sway their choice, I'm guilty as charged personally. This is because cash management is often dealing with shorter timeframes, low to no risk, and no options to generate significantly more returns until these funds integrating options strategies came along. When I was saving for my house down payment from 2018-2021 I needed every dollar I could get and an extra $500 gain meant my inspection was covered (you should get an inspection).

Tax Implications

Another key difference between these two funds are the tax liabilities. CSHI is taxed at 98% of your ordinary federal income tax rate per the tax filing in 2023. Some states have different tax rules when it comes to treasuries or no income tax, so we will ignore that for this comparison. This tax really only affects the yield portion of your investment in CSHI, since there is little to no price return. For example, if your federal tax rate is 22%, your 6% yield is effectively 4.68%. Now, you may immediately say "Ally pays me 4.20% and is less risky!" not true, the same tax rules apply to income earned in your HYSA so that 4.20% is more like 3.28%, giving funds like CSHI and BOXX an edge.

The advantage BOXX offers on paper is better tax efficiency. Since there's no dividend, an investor will (ideally) pay long-term capital gains at 15% or 20% depending on their income bracket if they've held the investment for at least 1 year. For most people, like me, 15% is applicable. This makes a 6% total return on BOXX more like 5.1% vs. 4.68% for CSHI.

The downside to BOXX though is your returns are at the mercy of the NAV. I back tested 2023s total returns for both CSHI and BOXX and found CSHI outperformed BOXX at 6.30% vs. 5.03% respectively. Tax adjusted using the previous 22% federal tax bracket and 15% long-term capital gains rate, the effective returns are 4.91% and 4.28%. So, even though your tax rate is higher on CSHI, you're still earning a better return. In fact, even for a high earner in the 37% federal tax bracket/20% long-term capital gains rate, you would only come out ahead with BOXX by 0.05%: 3.97% for CSHI vs. 4.02% for BOXX.

Additionally, BOXX has less implied liquidity as a cash investment. Holding your cash in BOXX makes it such that you can't get the benefit of the long-term capital gains treatment this fund has unless you hold it for at least a year. While it's generally accepted to hold cash investments for 5 years or less, the name of the game is liquidity. If you sell BOXX early, your effective return would essentially be that of a HYSA, but with more hassle and no FDIC insurance.

Forward Recommendation

For those that follow me, you probably know my position on cash investments aren't favorable long-term, which would include funds like CSHI and BOXX. These are short-term investments and make for poor long term yield on cost (YOC) drivers. Though, I'm not at a phase in my life right now where I need or want a lot of cash, despite the enticing high yields.

That being said, those looking for a better high yield cash investment could consider CSHI for their short-term needs. The performance edge and income distribution CSHI has over BOXX makes it a better choice for most investors in the treasury bill space. Investors can use the fund for allocating cash toward things like real estate downpayment savings, an emergency fund, Capital Expenditures, or as a short-term play for investors with large cash positions in-between moves/other investments.

Though equal across the board for all cash investments, investors should take caution of impending rate cuts, which may begin in 2024 and likely to continue the next few years. This will drop T-bill yields, thus lowering the yields of these funds, but should still outperform traditional HYSAs.

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Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.