These 3 ETFs Yield Up to 12 Percent and the IRS Barely Touches the Payouts

Quick Read

• IWMI yields ~13% and IYRI ~11% by writing index options over small-cap and REIT exposure, reducing ordinary income taxes on monthly distributions.

• NEOS funds use Section 1256 options contracts, automatically applying 60/40 long-term/short-term capital gains treatment instead of ordinary income rates.

• CSHI layers S&P 500 put-spread premiums atop a T-bill ladder, pushing yield above 4% while maintaining a near-zero 0.01 beta and 0.38% expense ratio.

Three exchange-traded funds from NEOS have carved out a niche appealing to income seekers frustrated with how much of their yield ends up on a 1099-DIV as ordinary income. The NEOS Russell 2000 High Income ETF (CBOE:IWMI), the NEOS Real Estate High Income ETF (CBOE:IYRI), and the NEOS Enhanced Income 1-3 Month T-Bill ETF (NYSEARCA:CSHI) each pair familiar underlying exposure with an options overlay that pushes distributions well above what the raw asset class would deliver.

The three funds’ trailing-twelve-month distribution yields run from roughly 5% on the Treasury bill sleeve to about 13% on the small-cap version, with the real estate fund near 11%. The tax wrapper around those payouts matters as much as the size of the checks.

Why the IRS Takes a Smaller Bite

Index options that qualify as Section 1256 contracts are what NEOS uses to build its income overlay. Gains and losses on those contracts receive automatic 60% long-term, 40% short-term capital gains treatment regardless of holding period. A portion of each monthly distribution is typically classified as a return of capital, which reduces cost basis rather than triggering current-year tax. Shareholders in taxable accounts often see a lower effective rate on these payouts than on comparable REIT dividends or corporate bond coupons, where distributions land as ordinary income.

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Every fund below follows the same NEOS playbook: hold the underlying exposure, sell index call options against it (or put options in the T-bill fund’s case), and let the 1256 treatment and return-of-capital classification handle the tax work.

IWMI: The Highest-Yield Anchor

The standout on yield is IWMI. The fund owns Russell 2000 exposure, largely through a 99.56% allocation to the Vanguard Russell 2000 ETF, and then writes call options on the Russell 2000 index to harvest premium each month. Small caps carry higher implied volatility than large caps, translating directly into fatter option premiums, which is why this fund distributes more than a comparable S&P 500 covered call product.

Monthly distributions in 2026 have ranged from $0.571 to $0.6277, with the July payment at $0.625. Trailing twelve-month distributions total $7.16 against a share price of around $53. Shares are up over the past year, and IWMI has kept pace because small caps have participated in the broader rally, and the call overlay uses data-driven strike selection rather than deep in-the-money writes that would cap all upside.

The net expense ratio is 0.68%, with a gross figure of 0.76% before waivers. Any sustained small-cap drawdown will hit the share price harder than a large-cap equivalent, and option premiums will only partially cushion the fall.

IYRI: Real Estate Income Without the REIT Tax Headache

The most interesting place for the tax argument is IYRI. Traditional REIT dividends are taxed as ordinary income because REITs pass through earnings to avoid corporate-level tax, and an investor in the 32% federal bracket loses nearly a third of a REIT’s payout to the IRS. IYRI holds a diversified basket of REITs, with top positions reportedly including Welltower, Prologis, and Simon Property Group, though it wraps that exposure in the same options overlay used by its sister funds. A meaningful share of the distribution is reclassified as a 1256 gain or return of capital rather than ordinary REIT income. 

Monthly payments in 2026 have clustered between $0.4405 and $0.4550, with trailing twelve-month distributions of $5.41 on a share price near $49. The fund has lagged IWMI because REITs have struggled amid the 10-year Treasury yield near 5%, its 12-month high. Higher long rates compete directly with REIT valuations.

The expense ratio is 0.68%, with no waiver gap. If Treasury yields keep rising, the underlying REIT holdings face a headwind that no amount of call premium can fully offset.

CSHI: The Conservative Sleeve Most Screens Miss

The overlooked pick on this list is CSHI. Most yield screens skip it because a T-bill fund yielding around 5% looks unremarkable compared with double-digit yielders. The fund holds a rolling ladder of 1 to 3-month Treasury bills, then sells cash-secured put spreads on the S&P 500 to layer additional premium on top of the T-bill coupon. Current 3-month T-bill yields are near 4%, and 6-month yields are near 4%, so the overlay pushes the total distribution above the risk-free baseline.

The share price behavior is consistent with that description. CSHI trades around $50, has been essentially flat over the past week, and has returned about 5% over the past year. It behaves like cash with an income kicker. The beta of 0.01 means it does not meaningfully participate in equity drawdowns, serving as portfolio ballast rather than a return driver.

The expense ratio is 0.38%, roughly half of what the equity-based NEOS funds charge. The tax angle still applies: the put-spread premium receives 1256 treatment, so even the enhanced yield above the T-bill baseline avoids being taxed entirely as ordinary interest income. With the Fed funds rate at 4% following 75-basis-point cuts over the past year, the option overlay becomes more valuable as the underlying T-bill yield compresses.

Matching the Fund to the Investor

The three funds solve different problems. IWMI fits an investor who wants equity-like total return with a fat monthly check and can tolerate small-cap volatility. IYRI works for someone who already wants REIT exposure and is tired of watching a third of the yield disappear to ordinary income tax. CSHI belongs in the cash sleeve of a taxable account, replacing money-market funds where the enhanced yield plus 1256 treatment can add up over time without introducing meaningful principal risk.

The common thread is that the tax wrapper matters as much as the headline yield. A 13% distribution taxed at ordinary rates and an 8% distribution taxed at long-term capital gains rates can leave the after-tax income roughly comparable, which is the calculation these NEOS products are engineered to shift.

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