Summary NEOS Bitcoin High Income ETF offers Bitcoin exposure with high income via a covered call strategy, currently yielding around 30%. BTCI generates monthly dividends by selling call options on Bitcoin, providing regular income but with variable payouts due to Bitcoin's volatility. The ETF holds Bitcoin through the VanEck Bitcoin ETF and synthetic positions, investing surplus cash in treasuries for additional yield. BTCI has underperformed Bitcoin since inception and remains a high-risk investment, but may appeal to income-focused investors seeking crypto exposure. Article Thesis Bitcoin ( BTC-USD ) is a very volatile asset with historically strong returns. It does not offer any income, however, and is a pure price appreciation play. NEOS Bitcoin High Income ETF ( BTCI ) is an ETF that seeks to combine Bitcoin exposure with income generation via a covered call option strategy. That results in a very high income yield, but BTCI has underperformed Bitcoin since its inception, and I believe that the ETF shouldn't be seen as a low-risk investment at all. Past Coverage I have not covered NEOS Bitcoin High Income ETF in the past, but I covered another NEOS income fund here on Seeking Alpha in the past: QQQI ( QQQI ), NEOS' NASDAQ-100 covered call ETF, on which I wrote a bullish article in May , with shares returning 16% since then. For income investors who are interested in high dividend yields, this ETF (and article) could be of interest. Bitcoin: Advantages And Disadvantages Bitcoin has, since its creation, been an excellent investment for long-term holders. The cryptocurrency has risen from way less than $1 per coin to more than $100,000, turning long-term holders rich. Bitcoin offers inflation protection, since a finite amount of Bitcoin can be created, it offers independence of central banks, can be stored decentrally, and so on. On the other hand, Bitcoin has some disadvantages as well -- it is very cyclical, taxation of gains can be complicated in some jurisdictions, and it does not offer any income or cash flow -- for positive returns, investors are thus forced to sell, with price appreciation not being guaranteed, despite strong historic returns. The last point, dependence on price appreciation due to there not being any cash flow, is what the Bitcoin ETF from NEOS seeks to solve. NEOS Bitcoin High Income ETF: Overview NEOS is an ETF manager that is focused on income ETFs that it primarily creates via covered call option strategies, including ETFs with the NASDAQ-100, the S&P500 ( SPY ), or Gold ( XAUUSD:CUR ) as a basis. The ETF we'll look into today, NEOS Bitcoin High Income ETF, uses Bitcoin as a basis and generates income via a covered call option overlay. A call option contract allows the buyer of the contract to buy an asset, such as Bitcoin or a stock, at a specified price during a specified time frame. The seller of the call option contract gets a payment when the option is sold -- the option premium. A covered call option strategy means that an investor holds an underlying asset, in this case Bitcoin, and sells call options to receive income via the option premiums that the seller of the option gets. If you want more information about covered call options in general, check out this article from Seeking Alpha. In BTCI's case, the strategy works like this: The ETF holds a position in Bitcoin and sells call options on Bitcoin at the same time. By selling these call options, BTCI receives regular cash flow, which is then paid out to the ETF's holders via dividends. The long position in Bitcoin, the underlying asset, is created via an investment in the VanEck Bitcoin ETF ( HODL ) and via a synthetic long position (buying a call option and selling a put option at the same strike price) in the CBOE Bitcoin US ETF Index ("CBTX"). Since the synthetic long position does not require the same amount of money being invested compared to a regular long position, the ETF has some surplus cash that is mostly invested in treasuries, which has the benefit of creating some additional income via the interest that the ETF receives. The following chart shows what BTCI's assets look like right now -- the data is from BTCI's fact sheet : BTCI assets (BTCI fact sheet) The long call option and short put option positions with a strike price of $2,680 create the synthetic long position, the two short call positions with a strike price of $3,050/$2,900 create the covered call position, and the money that isn't needed for anything else right now is either held in cash or treasuries. BTCI: A Lot Of Income Whether option premiums are high or not depends, among other factors, on volatility. Bitcoin is a very volatile asset, thus option premiums are pretty high. That's good for BTCI, as it means that the ETF receives a lot of cash by selling covered call options. This explains how the ETF is able to offer such a high dividend yield to its investors: per Seeking Alpha, its dividend yield is exactly 30% right now. BTCI's dividend is paid out monthly, which generates a very nice regular income stream. It's important to note, however, that the monthly payments vary to some degree: Volatility is higher in some months and lower in others, which results in higher/lower option premiums, which results in higher/lower dividends, all else equal. We see this in the following table: BTCI's dividend payments over time (BTCI fact sheet) There are some ups and downs in the dividend on a month-to-month basis, and a bit of a downward trend over time. But even if BTCI were to only pay out the lowest of these payments, $1.26, in the future, the yield would be pretty high, at around 27%, based on a current share price of $57. Is BTCI A Good Investment? NEOS Bitcoin High Income ETF does not have a long history, but since its inception last fall, just above one year ago, returns have been strong: its price has appreciated by 12%, and investors got a lot of income on top of that. But since BTCI is exposed to price movements of Bitcoin, we should compare its performance to that: Data by YCharts We see that BTCI has underperformed Bitcoin to some degree since its inception, even with the dividends from the ETF being accounted for -- returns were strong, but holding Bitcoin would have resulted in even better returns. While BTCI has outperformed most stocks and stock indices such as QQQ ( QQQ ) or the S&P 500 since its inception, I don't think that's a good comparison: going long BTCI means more volatility and more risk compared to stocks, as Bitcoin has regularly experienced big drawdowns in the past, 80% or even 90% in some cases, which is not the case for stock indices over the same time frame. Regulatory risks are also larger when having Bitcoin exposure, I believe. If Bitcoin were to fall a lot, the same would be true for BTCI, as its underlying assets mostly consist of (synthetic) Bitcoin. The risks of owning BTCI are thus comparable to those of owning Bitcoin outright, with history suggesting that Bitcoin has a somewhat better return outlook. This is due to the following reason: The problem with a covered call strategy is that the upside is limited at the level of the strike price of the call option. If the underlying, in this case Bitcoin, appreciates in price quickly, the call option seller may not participate fully. The downside isn't limited, though, meaning the call option seller does participate fully. Depending on the ups and downs of Bitcoin, BTCI may thus move down when Bitcoin moves down, but not move up as much as Bitcoin does during positive days/weeks/months. The income that BTCI generates wasn't enough to fully offset this, which is why BTCI underperformed Bitcoin. Going forward, the same could happen: BTCI may very well continue to underperform Bitcoin while having the same downside risk. Some investors may decide that the high yield is worth this return risk, but I think that those who want Bitcoin exposure may fare better with a pure Bitcoin long position instead of owning this ETF. I remain on the sidelines and rate BTCI a "Hold".
