[0:00]This video is for educational and informational purposes only and does not constitute financial, investment, or tax advice. I am not a financial advisor. Please always do your own research. Investors, welcome back. A very special guest. We have Troy Cates, the co-founder and managing partner there at Neos Investments. We're in this video. We're going to be covering a little bit more about Neo's boosted series products, that being XQQI and XSPY. As well as they do have XBCI, but this video will be focused more on XSPI and XQQI. But with that, Troy, welcome back to the channel. It's been a, it's been a while. That's, yeah, it's been a, it's been a little while, but thanks for having me back, Marcos. Always look, look forward to these conversations. First question for you is, I want to get your thoughts on the current performance of XQQI and XSPY. Your boosted series products that are equity-based, it's currently outperforming SPYI and Triple QQI since launch of these boosted series products. And I've been a huge fan of these products myself, and I just want to ask you, what do you attribute the performance to in the recent months relative to Triple QQI and and also SPYI? Sure, it's a great question. So if you think about, let's go back to what these products were built to do. Um, so if you think about, they're both boosted or levered versions of those underlyings. So XSPI is the boosted levered version of SPYI, and XQQI is the boosted levered version of QQQI. So, um, we were looking to add additional leverage up to 150% or one and a half times notional of the underlying, um, core ETF. and call of the core ETFs, SPYI or QQQI. So the structure's still the same. So if you're looking at SPYI, remember, we're long all 500 plus names in the S&P 500. Then we're using those S&P 500 index options and selling calls out of the money to bring in that premium to distribute on a monthly basis. Um, what we're looking at to do in the boosted version is the same structure. So if you were to pull up the holdings, you'd see all 500 plus names in the same waiting. You'd see those, uh, short index calls, um, to bring in that premium. But to get the additional notional leverage, we are doing a put call combo, which is we're buying a call, selling a put with the same strike and same expiration, using those, in this case, S&P 500 index options. Um, to give us that additional long leverage, and then we are adding additional calls at the same strikes that we sold the other calls at, um, to bring in additional income for that added leverage. Um, now, it's important to understand that the leverage works both ways. When the market's moving higher, you're going to have levered upside returns. When the market's moving lower, you can potentially have levered, um, to the downside where you're losing more than the underlying core product in SPYI, for example. So, it's, it's important for people to know that leverage can go against them and it can work for them, um, in certain instances. Um, and so the products were built to say, you know, if you look at our suite and let's stick with SPYI for now. SPYI is the core. Then you have the hedge version in SPYH, but then on the other end, you have the boosted version and XSPYI. And when you're thinking about that boosted version, it's more of a risk on. Um, a lot of people will look at SPYI and say, I like the S&P 500. I'm willing to take that equity risk, but I also want to earn some, um, monthly distributions, so SPYI makes a lot of sense, but if they're willing to be a little more risk averse, maybe the boosted version is good for them. Maybe it's something that they should look at and maybe that because not only are you getting the, um, potential of the extra leverage on the long side and moving, you know, actual total return, but the additional, um, premiums that you're receiving off those short calls that get distributed out. So that distribution is larger than the core product.
[4:06]And the same goes for QQQI and the boosted version of that. So the products look very similar, but then you're adding that notional, that, that long leverage part via the put call combo, and then QQQI, we're using those Nasdaq 100 index options. So, we really wanted to do it a little differently than other people do their levered products, which is usually from a swap, and then it's more of a truing up that swap. Is it a daily traded product? This is more the way we look at it. Uh, the way we view the world as long-term leverage, how are you going to continue to, if you have a view on the market that the markets are going to say, continue to go higher and you're willing to take that equity risk and that levered risk,
[4:47]maybe that's a product for you and maybe you can get better returns versus the core product and maybe larger distributions. If people do have a view on the S&P 500 or even the Nasdaq 100, even with Bitcoin, we got XBCI with Bitcoin, we got XSPI with the S&P 500, then XQQI with the Nasdaq 100. One of the big, I guess pushes that I've been telling all my friends and all my viewers is that the boosted series products, in my opinion, could be some of your best performing products in the next three, five, 10 plus years. If, you know, the underlying assets do appreciate, and I just want to touch on what was the story behind launching the boosted series products? What were talks like behind the scenes? Many investors, even like myself, I said, okay, I want to have better performance than the core series products like SPYI and Triple QQI. Because I long-term, I think that these could out-perform the core series products, SPYI, Triple QQI if, you know, the market goes into our favor.
[5:54]I think you just, yeah, you nailed it on the head right there. I think it's, it's for people that have that longer-term view of the markets will continue to move higher. And sometimes it's a shorter-term view. Some people, um, we've talked to look at it and say, listen, I think that this time period, the next, making up three months, six months, might be stronger for the S&P or the Nasdaq, or maybe even Bitcoin gets the bounce that, um, everybody's been looking for after this big sell-off we've had in, in Bitcoin. And they're willing to take that extra risk to have a levered version during that time period. And we've seen a lot of people, um, from what we've talked to, keep their core position and maybe take some of the distributions they're receiving off of that and then go into a boosted version to add that additional, um, long levered portion of it. So, um, we haven't seen people necessarily trading out of it to go into the boosted version, but to enhance it almost in a way, uh, by owning the core and then adding the boosted on top of it for those periods of time where they might think they have a view like you, um, where they might think that the market's going to continue to move higher. Now, I want to touch on why 150% exposure. Why not a 1.3x, 1.2x? Because I think you guys probably have the more aggressive exposure versus other income products that I've seen in the States and even in Canada. So why 1.5x? Um, 1.5x came up because we were looking actually, a lot of the products out there, um, are 2X or trying to be higher. We've seen a lot of filings lately of, of funds trying to do more leverage, and we wanted to be, uh, more on the conservative side with only one and a half x. Yes, we've seen some products out there 1 and a quarter, 1.3. But for us, as we were doing our testing, um, we really liked the one and a half leverage because it gets you, um, in most cases, and this is not all because it's leveraged and and the market's moved, but in certain cases, it can get you back to, um, a full return of what the underlying reference asset is.
[8:20]So, we felt like that was a good place to start with these boosted products and really wanted to get the suite out, um, for, you know, our three biggest products being BTCI, SPYI, QQQI, and, um, see how it goes, see what the reception is and potentially build it from there. Online, I was, I was seeing a lot of comments just on regular, just cover call ETFs as a whole, and the biggest complaint from investors was like, why cap my upside to underperform like the relative underlying index? Were you guys seeing those comments before you guys launched the boosted series products? Because now, this is just my view that with the additional leverage exposure, investors could defy like that logic and potentially keep up with their, you know, the S&P 500, the Nasdaq 100, even in some cases outperform it with additional leverage exposure. Of course, we've always talked to investors and advisors on, you know, your biggest risk in most cases in a covered call product is missing out on the upside. They understand what the underlying risk is if, whether it's S&P, Nasdaq, or, or others. They understand that equity risk. And if the market, if the underlying's moving lower, this is going to move lower, but they want to know what their risk is on the upside. How much will they miss on the upside? How far out of the money are the short calls? How much notional are we covering? What does that mean when we go through the short call strikes like we have this past month? We're sitting here, um, towards the end of April right now, and we've seen this huge rally off the lows given what's going on geopolitically. And, um, you know, some of our, we've gone through some of our short call strikes in some products, and because of our notional coverage, they could continue to participate past there because they're not fully covered by the short calls. So, it's something that has been brought up a lot. Where, what am I missing by capping my upside? I'm taking real premium from selling those short calls, but I'm getting that premium because I'm giving it away if the market does move higher. Now, I want to touch on how the boosted series products could move relative to SPYI and Triple QQI, maybe even BTCI as well. In a flat, downward and upward trending market for the underlying reference assets. So, let's start with the first one, in a flat market, um, just like the core product, say SPYI and the boosted version. Those should, in most cases, out-perform the underlying reference asset because you're bringing in premium, um, and you're not necessarily moving higher. The underlying reference is not moving higher to where you would go through the strikes and have a, maybe a a larger liability on those short calls. So, if you're bringing in that premium, you should out-perform on those flat months by the amount of premium you brought in. And the same goes for the boosted. Um, in the down markets, um, you know, SPYI is going to out-perform again by the amount of premium it brings in versus the S&P 500. The boosted version, um, remember, it's levered long. So, while it brings in a little bit more premium, you might have a little bit more of out-performance if it's down 1, 2, 3%. Um, but if we have a big move down, uh, that levered long, you got to remember that those short calls only give you so much, you know, breathing room on a downward move and out-performance, but as it's levered long, you will underperform not only, uh, the core product, say SPYI, in this example, but could potentially underperform the S&P 500. So, it's something to, to keep an eye on if you are in whether it's our product or any levered product, to think about what that leverage means for your portfolio. And then on the upside, the idea is it should out-perform the core product, SPYI. It should, um, potentially keep up with the underlying reference, but it should out-perform SPYI because you had that added long leverage. Now, one comment that I got a lot was people saying, you know, I'm not going to touch the boosted series products because of the risk of the, you know, 150% exposure, 1.5x leverage. We've seen regular leverage products without income at 2x, 3x, so many filings were denied by the SEC for like 5x. I think maybe even 10x leverage ETFs.
[12:39]But you guys have 1.5x. With the covered call overlay, though, wouldn't it exposure be like 1.3x because you have like the additional premiums coming in? So, it would technically be, it's still risky, but like a little bit less risk than just like a regular straight up 1.5x ETF. Because you guys have covered calls as like an overlay. Yeah, so you're thinking about it, right? So if you took our boosted Nasdaq version versus a one and a half X, uh, you know, levered version of the just the Nasdaq 100. Yes, our products will have a lower wall than that product. So, while we're still aiming for that one and a half times, um, we're still writing calls. So, we're bringing down the volatility because you're essentially capping part of your upside. And on the downside, you are giving yourself a little bit of room because the amount of premium you brought in. So, it is different than a normal levered product. And listen, these aren't like, like you said, they're not for everyone. Um, and if people don't, um, either understand the leverage part or do understand it and it's not for them because they're more conservative, we have products, uh, that might be more suitable for them, whether it's the hedge version, you know, QQQH or SPYH. That might be of more of interest because it gives you that measure of downside protection and it's a lower wall product than, than the core product. Now, with the additional long exposure to, you know, have that leverage exposure, what's like the main benefit in your opinion or is it the same? Is it for more additional income for investors, or is it just that upside capture in an upper trending market where investors before with ETFs that don't have a leveraged exposure, they could underperform their underlying asset? I think it's, um, the potential for both, the potential for an upward moving market, a greater total return versus the core product, it's the potential of additional income. Uh, coming off, um, those additional calls on the levered version. So, I think, you know, we've seen investors and talked to investors that, that like it for both. They're really looking for something that's going to out-perform where our core product is and potentially perform as well as the underlying reference asset and at the same time earn a good amount of income. Um, so that's, you know, I think people are looking for both in those cases. Target distribution rates for the boosted series products. How do you guys achieve a higher distribution rate with these products? Like, where does it come from? Because so, some investors are like, okay, if SPYI, Triple QQI, even BTCI already have pretty, I'd say attractive yields, these ones are higher. So, many investors might want to know, what does the yield come from? How are you guys able to pay a higher yield? And then in this case, if the market goes up long-term, how are you guys able to not only pay out that yield, but also have a, you know, hopefully, a good total return? Yeah, that's a great question. So, um, the target ranges are, you know, basically call it one and a half times what the target ranges are of the core. So, if the core, say S&P 500, SPYI, is 10 to 12%, um, the goal for XSPYI is, you know, in the 15 to 18% range.
[15:58]So, when you think about, um, that range, how are we doing that? Um, you're thinking it, it's the added leverage you're taking on the long, maybe gets you potentially a better total return in the upward markets. Uh, upward moving markets, but the added, um, short calls, because when we're adding that long leverage, we're not just adding the long leverage, we're adding short calls. So, if we're, for example, I'll give you an example, this month, uh, SPYI is 50% covered on the, uh, short calls. We had, um, a lot of volatility coming into, um, the end of March given what's going on in the world. And with that added volatility, we were able to, um, through our rules-based strategy, write calls further out of the money and cover less of the notional. So, it's about 50% covered, um, as well, but when you think about it, we're covering that long extra long notional as well. So, we're adding short calls to keep that ratio the same. And when we add those short calls, we have more premium coming in that we can distribute out. Now, with the leverage, you guys are using a synthetic long. Why not a swap? Why not futures? I think those are like the two popular points of leverage, especially the swaps. Why, why did you guys go with the, you know, the synthetic long versus those products or those types of exposure? Uh, we did it for a few reasons. One, we wanted to try to stick with what we do best, which is trading option portfolios. So, we wanted to stick with the index options in this case, um, where we could, um, one for the tax efficiency that we've talked about behind using index options, um, where you get that 60/40 split from the 1256 rule, 60% long-term cap gains, 40% short-term. Um, because these synthetic lungs, we're rolling them, um, anywhere from monthly to quarterly, so we want to make sure that we're doing it in a tax-efficient manner. Swap, total return swaps are, are not always as tax-efficient. They could be a lot of ordinary income that gets kicked off. So, we wanted to move away from that to adjusting a swap on a daily basis. And so and and stay away from futures. So, we really just wanted to focus on the options market around, uh, these reference assets, which, you know, is, is kind of what we do at our core. Walk me through the expense ratio as well. The expense ratio, in my opinion, is, I think where it should be because you're also getting the leverage exposure, which does cost, you know, of course, money. In this case, it costs an additional fees for investors, but investors get, you know, the active management by Neos, the the tax efficiency management by Neos, the leverage exposure, and then of course, that cover call overlay all into one package with these booster products. Yeah, so for our expense ratios, um, they range from as low as 38 basis points on some of our fixed income products to as high as 98 basis points, say on the boosted products. Um, our core products, like SPYI, QQQI, and so forth, are right at 68 basis points. And when we were bringing out the boosted versions, um, there is more work that goes into it. There was a lot of development on our part, um, but there is more work on the trading desk and making sure these synthetic longs are doing what they need to do, um, with inside the portfolio. So, we thought 98 basis points, which is the top of our range for our suite of 19 ETFs, we thought that was appropriate for what products we were bringing out. The tax efficiency of these products because you guys aimed for tax-efficient income, but also, you know, never to over-distribute to investors. You guys always want to keep a good reputation. I've seen some other ETF issuers launching products that, you know, are promising to be more tax-efficient versus their current products because the older, more, I guess, traditional covered call ETFs were meant for, not meant for, but they didn't have index options or high rock. They were just meant for pension funds, endowment funds, which don't pay any taxes. And now retail investors, of course, we, we pay taxes. So, a lot of investors are gravitating towards your products because you guys actually, in my opinion, do care about the tax efficiency of these products when investors do take in the distributions as income. So, I just want to get your thoughts on, on this whole take I just had. You know, we do focus as much as we can on the tax efficiency. We focus on, um, having underlying holdings that might be tax-efficient. That might be Treasuries that are exempt from state and local taxes, and that gets passed through the ETF structure. That might be, um, holding underlying equity names where you get qualified dividend income off of, um, even if it's a portion of the distribution that's going out because that passes through and that's a lower tax rate than ordinary income.
[20:44]Um, and it might be, as we talked about before, the index options. And thinking about that 1256 contract, the 60/40 split that you get off of that versus an equity link note, a swap, as we were saying before, um, even some ETF options or even, uh, single-name options. So, we try to think about the tax efficiency from inception, and then as you know, we do a lot of work around, um, getting, um, where we can, if anything could be classified as return of capital. And we're not trying to return principle, we're not trying to over-distribute, but if from an IRS standpoint, your distribution that is going out can be classified as partially or all return of capital. That's just lowering your cost basis and deferring your taxes down the road. So, we spend a lot of time going through that on the way we structure things. Generate return of capital. It's, um, you know, you're generating a loss within the portfolio, a realized loss. There might be unrealized gains or losses that you're not touching, but when you can generate a realized loss within the portfolio and then have a distribution going out that can be categorized potentially as partially or all return of capital. And then, um, at the end of the year, when the fund accounting teams at our fund accountant US Bank, and the auditors get together and go through all the realized trading, um, within the portfolio and figure out, um, the distributions on top of that. Then they build the 1099s that go out to the brokerages, and everybody in in late January, early February will get their 1099 saying, hey, X percentage was returned to capital, X percentage was, you know, long-term, short-term, and so forth. So, it's important to to, you know, make sure you understand that 1099, talk to your tax professional. Um, if you have an advisor, talk to that advisor what is the 1099 mean, what does it mean for the portfolio. Something to understand is just because a fund had a certain percentage of return to capital, say last year in 25, it's not guaranteed for this year in 26. Um, while we do our best to manage around, um, and and have any of those distributions categorized that way, it's there's no guarantees. And so, it's a, a topic that comes up a lot because a lot of people will reach out, we have advisors talking to us all the time about it and try to understand what what the potential return to capital might be for 26. And to be honest, we don't know. It's, it's, you know, we're a one quarter in, just a little over one quarter into the year. We don't know what the rest of the year's going to look like and what that potentially could be. So, it's important to stay on top of it with your tax professional and talk to them because, um, you know, as, as you know, we don't give tax advice here, we can't give tax advice, um, nor would we want to. So, it's definitely good to talk to your tax professional and understand that. I think a lot of people, and I know we've talked about this this offline. A lot of people look at like 19A1 notices and say, okay, they, they have to put that out on a monthly basis. And it's important to know that a 19A1 notice is a requirement by the SEC if you're potentially are distributing anything other than net investment income, which we have traditionally in some of our products with return to capital and so forth. Um, but it's not a product, it's not a document produced by Neos. It's a document produced by, um, our fund accounting team at US Bank, and then it's a requirement to put on our website. It is not, um, it should not be used for tax reporting purposes. Um, it is just an estimate. It's a really important to know that is an estimate of what the potential could be for say, return to capital. And it is not always right because it's going off book basis. It's not doing going through the accounting process and making sure it's very close to what it potentially could be. So, it's important to know that the 19A1 notice is not something we produce and put out there for information. It's something that's required that goes out, it's not our document that we actually put together. Now, I want to move on to distributions. So, I noticed that the XQQI and XSPY distribution has been decreasing since launch, but also the market since launch has been, I guess, unfavorable for a lot of ETFs that launched at that time. So, can you explain why that is? Because I thought that volatility would technically increase during, you know, volatile downward movements in the market. When does Neos like to increase distributions since these two funds, of course, have been performing very well in the last month, which of course, you guys haven't paid that distribution yet for, well, it's going to be upcoming in May. No, that's a good question. So if you think about it, it might be lower on a dollar basis or a cents per share, but if you look at it on a percentage basis, it's been right around the same. So, like we were saying earlier, the range that we're aiming for in XSPYI is at 15 to 18% range. The distribution was just over 17%, um, on an annualized basis. So, the range is, it's still within the range, but because the share price went down, the distribution, the the distribution rate should be very similar to what it was, but it might be more cents per share because the dollars have, have risen in the in the market over the past couple weeks. Now, with the boosted series products, at least on the equity side, is your guys' philosophy to kind of pay out like that consistent, stable distribution? Because I know when we've had conversations, well, many of them, I remember last year talking to you about the the core series product's distributions, you know, SPYI, Triple QQI, and they've been super, super consistent, very tight, I guess, tight spread on the distributions month over month. And with these products, could investors experience the same thing with the core series product's distributions, or could they potentially experience a like, I guess, a growing distribution over time if the market is favorable long-term with these products? That's a great question. It's the idea is to keep it, um, tight like we do the core products within the same distribution target range for the annualized number. If the markets are moving higher and the actual price of the underlying, um, boosted series, um, ETFs is moving higher. Again, that dollar per share might be higher, but on an annualized, uh, distribution rate, the percentage should be very similar. We're trying to keep it tight within that range, and again, when we're thinking about that range, that goes into how our rules-based, you know, system works. And how much notional's covered? How far out of the money are the calls when we're rolling things on a monthly basis? So, that all kind of plays into itself, but we try to keep it within that distribution range, um, if we can. Now if you guys like this video, please give it a like because this cute puppy did. And don't forget to check out our last interview, and we will see you guys all on the next one.
