What is a Boomer Candy ETF?

NEOS S&P 500 Hedged Equity Income ETF (SPYH)

The NEOS S&P 500 High Income ETF (SPYI) has become a major success in the covered call category, swelling to approximately $11.59 billion in assets under management. Much of its appeal comes from a 12.04% distribution rate that has historically been composed largely of return of capital (ROC).

Its far smaller sibling, the NEOS S&P 500 Hedged Equity Income ETF (SPYH), manages only about $31 million and currently offers a lower 7.93% distribution rate. There is a reason investors receive less income: some of the option premium that could be distributed is being spent on downside protection.

The strategy starts with S&P 500 equity exposure and a covered call overlay. From there, NEOS adds a put spread collar designed to reduce downside risk.

The long put is the primary hedge. Buying a put gives the portfolio the right to sell at a predetermined strike price, meaning it begins offsetting losses once the S&P 500 falls sufficiently far. The problem is that puts cost money, and continuously purchasing portfolio insurance can create significant negative carry.

To help finance that protection, the strategy also sells a lower strike put. That premium reduces the cost of purchasing the higher-strike protective put, but it also limits how much downside protection the put spread ultimately provides. Once the market falls through the lower strike, losses can begin again.

Combine that put spread with the premium received from selling covered calls and you get a net credit put spread collar. "Net credit" means the premiums collected from the short options are intended to exceed the premium paid for the protective long put. Instead of continuously paying out of pocket for portfolio insurance, the overall options package can still generate net premium.

That's what makes the strategy fit my definition of boomer candy.

Part of the option premium is available to support distributions, while another portion effectively pays for a buffer against market volatility. Investors shouldn't mistake that for complete downside protection though.

The hedge only covers a defined range of losses.

The protective put begins providing protection after its strike is breached, but because a lower strike put has also been sold, that protection eventually runs out during a sufficiently severe market decline. Meanwhile, the covered calls continue to limit some upside participation during strong rallies.

Tax efficiency is another attraction.

Like SPYI, the fund uses S&P 500 Index (SPX) options, which generally qualify as Section 1256 contracts.

Gains and losses on these contracts receive 60/40 federal tax treatment, meaning 60% are treated as long-term and 40% as short-term regardless of how long the options were actually held.

The distribution itself has also been relatively tax-efficient so far.

According to the fund's latest Section 19(a) notice, approximately 90% of the most recent distribution was estimated to be return of capital, which generally isn't immediately taxable when received.

Instead, it reduces the investor's cost basis, potentially deferring taxes until the ETF shares are eventually sold. As always, Section 19(a) classifications are estimates rather than final tax determinations.

Kensington Hedged Premium Income ETF (KHPI)

Competing directly against SPYH is the Kensington Hedged Premium Income ETF (KHPI), which has attracted considerably more investor interest so far, accumulating $428 million in assets. KHPI currently advertises a higher 9% distribution rate, although investors pay considerably more for the strategy. Its 0.98% expense ratio compares with 0.68% for SPYH.

The portfolio begins with exposure to the S&P 500, obtained through a combination of low-cost underlying ETFs and futures contracts. Kensington then adds two options components designed to simultaneously reduce volatility and generate income.

The first consists of put spreads on a quarterly basis. As discussed earlier, a put spread generally involves purchasing a put to establish downside protection while selling another put at a lower strike to offset some of the cost. The protection therefore covers a defined range of market losses rather than insuring the portfolio all the way to zero, which is much more expensive.

To help generate income and offset the cost of those hedges, KHPI also sells call spreads. The fund sells a call option while simultaneously purchasing another at a higher strike. Because the lower-strike call being sold is more valuable than the higher-strike call being purchased, the trade generates a net credit.

If the S&P 500 rises above the short call's strike, that position begins working against the portfolio's gains. However, once the index rises above the higher strike of the purchased call, the long call begins offsetting further losses on the short call. Depending on how those spreads are positioned, that can potentially preserve more upside than a conventional covered call strategy.

So far, the risk statistics suggest the hedging component has done its job. According to Kensington, through June 30, 2026, KHPI exhibited annualized standard deviation of 9.23%, compared with 13.39% for the S&P 500. Its maximum drawdown was also shallower at 4.93%, versus 7.50% for the benchmark.

The fund's capture ratios provide another useful perspective. KHPI recorded an upside capture ratio of 62.74% and a downside capture ratio of 63.03%. In other words, it historically participated in roughly similar proportions of the market's advances and declines over the period measured.

Please note that this article reflects the author’s personal views and does not represent the opinions of the publication or its affiliates. It is for informational purposes only and does not constitute investment advice. It is essential to seek guidance from a registered financial professional before making any investment decisions.