Summary BTCI, launched in October 2024 with over $75M AUM, has returned 38% compared to Bitcoin's 48%, capturing about 50% of Bitcoin's price appreciation. The ETF pays a 28.17% distribution yield, with 96% of income being a return of capital, and options premiums enhancing returns while hedging. NEOS' Managing Partners aim for a 25-30% target distribution, leaving 25%+ of the portfolio for capital appreciation. Cryptocurrencies have gotten a lot of attention from both traders and investors over the last decade. While many well-known wealth managers, such as Warren Buffett, have stayed away from Bitcoin, a lot of individuals have made significant gains on relatively small investments in these assets. Bitcoin has by far gotten the most attention and capital of the cryptocurrencies. One newer exchange-traded fund that seeks to balance income with total returns by investing in Bitcoin is the NEOS Bitcoin High Income ETF ( BTCI ). A Chart of BTCI (Seeking Alpha) This NEOS fund has offered investors total returns of 11 percent since the ETF's inception in October 2024. The price of Bitcoin that this investment's holdings seek to track is up 17.25 percent during this same time period. Today, I am initiating coverage of the NEOS Bitcoin High Income ETF with a sell rating. While the options strategy of using synthetic call spreads and selling out-of-the-money calls against existing holdings is generally more effective at capturing most of the upside of a position while still being able to offer investors income, this approach does not work with assets such as Bitcoin that are too volatile. The recent sell-off highlights the weaknesses of the construction of this investment. The fund managers' stated goal of 25-30 percent annual distributions is also too ambitious and will likely force the ETF's managers to get increasingly reckless if the investment can meet these unrealistic goals. BTCI has an expense ratio of .98 percent, $127.24 million in assets under management, and a trailing yield of 17.57 percent. The fund does not own actual stock, but instead uses synthetic call spreads to take a position in the VanEck Bitcoin ETF ( HODL ). BTCI sells monthly at-the-money and out-of-the-money calls against in-the-money call options to make monthly payouts. The out-of-the-money calls this fund sells are generally 0-15 percent out-of-the-money. This ETF does not always cover all of the holdings with covered calls, and sometimes the fund managers only write calls against 50 percent of the positions of the investment. BTCI seeks to always leave at least 25 percent of holdings open without coverage from call options. Most of the fund's payouts are taxed as return on capital, and the ETF also holds some fixed-income assets such as US treasury bonds. A Chart Showing BTCI's Holdings (Seeking Alpha) Bitcoin is a very volatile asset. HODL has annual volatility levels of 53.85 percent, that is while above the average level of volatility for ETFs of 15.44 percent. Covered-call funds benefit from slightly elevated volatility rates that increased the implied volatility premiums in the options these investments sell, but excessive volatility usually creates significant risk to principal since these funds sell off upside potential while retaining most of the downside risks. Data by YCharts BTCI has sold off 11.37 percent over the last month, and the fund has offered investors total returns of 8.45 percent during this recent time period. Bitcoin has sold off 10.46 percent during this same time frame. BTCI captures nearly 50 percent of the upside in Bitcoin, but the recent sell-off suggests this fund still has comparable risks on the downside as owning the cryptocurrency out right would have, since the ETF has sold off nearly 80 percent as much as the underlying Bitcoin asset that HODL tracks. While the data is small since this fund came out less than a year ago, this information should concern investors. BTCI predictably performed well when Bitcoin was rising, and this ETF would also likely outperform the underlying cryptocurrency in a sideways or rangebound market, but when volatility levels become excessive the risk profile of this fund will likely disappoint most growth and income-seeking investors. A Chart Showing Bitcoin's Volatility Levels (Fidelity) Bitcoin's average annual volatility rate is 72.9 percent. Even though BTCI seeks to leave at least 25 percent of the assets in the fund open at all times, the risk profile of this ETF is still likely going to be asymmetrical since the call options this investment sells against this volatile ETF are only slightly out-of-the-money contracts. BTCI's stated goal of 25-30 annual distributions will likely be too ambitions, and could lead to the fund managers taking excessive risk as well. The idea of being able to receive 25-30 percent annual payouts has obvious appeal to both income and growth investors. Still, the most successful covered-call funds such as the JPMorgan Nasdaq Equity Premium Income ETF ( JEPQ ) have sold out-of-the-money covered calls against far less volatile positions than the VanEck Bitcoin ETF. While empirical data suggests that BTCI's options strategy has been the more successful approach, Bitcoin is likely too volatile for this fund to provide stable income or total returns over the long term.
