Options-Based ETFs as Fixed-Income Alternatives: What Investors Should Know

Higher Income Without Extending Duration or Lowering Credit Quality

This is one of those situations where investors are trying to have their lunch and eat it too. The goal is straightforward: retain the relatively low net asset value (NAV) volatility of a Treasury bill portfolio while earning more than the current federal funds rate of 3.50% to 3.75%.

Of course, there is no free lunch. To earn more income, you have to take on additional risk. The interesting part about options-based ETFs is that they let investors choose how that risk is introduced, rather than simply extending duration or lowering credit quality.

A good example is the NEOS Enhanced Income 1-3 Month T-Bill ETF

. At its core, CSHI is simply a portfolio of 1-3 month U.S. Treasury bills. On top of that foundation, however, the fund implements a put spread strategy using SPX index options. These are cash-settled S&P 500 index options that qualify as Section 1256 contracts, meaning gains and losses generally receive the favorable 60/40 tax treatment.

A put spread involves simultaneously selling one put option while purchasing another put option with a lower strike price. The premiums received generate additional income, while the purchased put helps cap potential losses. The trade-off is that the strategy still assumes equity market risk. During a sharp selloff, the strategy can experience meaningful drawdowns.

That dynamic is evident when comparing CSHI's NAV with the Bloomberg 1-3 Month Treasury Bill Index since the fund's launch. For much of its history, CSHI maintained a noticeable lead over simply rolling Treasury bills. During periods of market stress, however, including the April 2025 tariff-driven selloff, that excess return narrowed as losses from the put spread strategy materialized.

Source: NEOS Investments

In other words, CSHI isn't creating additional income out of thin air. Rather than accepting more interest rate risk through longer-duration bonds or more credit risk through lower-quality issuers, investors are accepting equity downside risk in exchange for higher income.

Based on the most recent distribution, CSHI offers an annualized distribution rate of approximately 4.7%. That comes at the cost of a higher 0.38% expense ratio, well above a traditional Treasury bill ETF.

Downside Protection with Less Duration and Credit Risk

One of the biggest lessons from 2022 was that bonds don't always provide the protection investors expect. As central banks aggressively raised interest rates to combat inflation, even high-quality bond portfolios suffered historically large losses as rising yields pushed bond prices lower.

A different weakness surfaced during the March 2020 COVID-19 selloff. Even investment-grade bond ETFs experienced periods of severe liquidity stress, with many corporate bond funds briefly trading at meaningful discounts to their underlying net asset values (NAVs) as credit markets temporarily froze.

One alternative is to replace some of those risks with options. A good example is the Calamos Laddered S&P 500 Structured Alt Protection ETF

. CPSL is a fund of funds that invests in 12 monthly vintages of the Calamos 100% Downside Protected S&P 500 ETFs.

Each underlying ETF uses a collar strategy consisting of a long put option combined with a short call option to provide 100% point-to-point downside protection over a one-year outcome period. In exchange for that protection, investors agree to an upside cap.

Source: Calamos Investments

By holding twelve overlapping outcome periods simultaneously, CPSL smooths returns across time. The trade-off is that the protection is no longer mathematically identical to owning a single buffered ETF from beginning to end. Even so, the laddered structure has produced relatively low realized volatility and significantly reduced drawdowns, while avoiding many of the timing decisions investors otherwise face.

Importantly, the risks being assumed are fundamentally different from those of traditional bonds. CPSL has essentially no duration risk because it does not own fixed-income securities. It also avoids credit risk because there are no corporate bonds in the portfolio. That creates an interesting use case.

With CPSL, investors are using options to deliberately compress the range of potential market outcomes. The result is a defensive allocation whose performance is not driven by interest rates or credit spreads. There is also a tax advantage because the strategy has not paid regular distributions.

The trade-off, once again, is cost. CPSL charges a relatively high 0.79% expense ratio, reflecting the complexity of implementing and maintaining the laddered options strategy.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.