Warren Buffett, the legendary investor, famously outlined a simple 90/10 portfolio strategy for his estate: 90% in a low-cost S&P 500 index fund and 10% in short-term U.S. Treasury bills. This allocation, while brilliant for long-term capital appreciation, presents a challenge for retirees seeking consistent income. Buffett’s original design prioritizes growth, leaving those dependent on portfolio distributions in a tough spot.
Traditionally, income-focused investors might consider two primary alternatives: periodically selling off appreciated shares (which can trigger capital gains taxes) or employing complex options strategies like covered calls themselves. However, a third, more accessible path exists through specialized Exchange Traded Funds (ETFs) designed for enhanced income.
By substituting Buffett’s conventional underlying assets with a pair of innovative ETFs from NEOS Investments, investors can maintain the core 90/10 structural integrity – a significant equity allocation alongside a stable cash component – but with a profoundly different outcome: a weighted average distribution yield of approximately 11.26%. This adaptation shifts the portfolio’s emphasis from pure growth to substantial, regular cash flow, albeit with certain trade-offs.
NEOS S&P 500 High Income ETF (SPYI)
The NEOS S&P 500 High Income ETF (SPYI) forms the cornerstone of the equity portion of this reimagined portfolio. Unlike traditional S&P 500 index funds that simply track market performance, SPYI employs a sophisticated, actively managed strategy. It holds a portfolio of large-cap U.S. stocks, providing broad market exposure similar to a standard S&P 500 fund. Crucially, it overlays this with an active options strategy involving both buying and selling SPX index options.
The use of SPX index options, rather than options on individual stocks or conventional ETFs, confers several potential tax advantages. These options are classified as Section 1256 contracts, which generally qualify for favorable 60/40 tax treatment: 60% of gains are taxed at long-term capital gains rates, and 40% at short-term rates, irrespective of the actual holding period. Furthermore, SPYI’s managers actively engage in tax-loss harvesting, which can result in a considerable portion of its distributions being classified as a return of capital. Return of capital distributions typically defer immediate taxation, instead reducing the investor’s adjusted cost basis until the shares are eventually sold.
After accounting for its 0.65% expense ratio, SPYI currently boasts an impressive 11.99% distribution yield, based on its most recent monthly payout. While this strategy prioritizes income, its performance history has shown reasonable resilience for a covered call-based approach. Over the trailing three-year period, SPYI achieved an annualized total return of 11.50%. For context, the CBOE S&P 500 BuyWrite Monthly Index, a benchmark for similar options strategies, returned 12.11% annually. It’s important for investors to note, however, that both these options-enhanced strategies significantly lagged the traditional S&P 500, which delivered an annualized return of 20.61% over the same period. This highlights the inherent trade-off: higher income typically means sacrificing some capital appreciation potential.
NEOS Enhanced Income 1-3 Month T-Bill ETF (CSHI)
Buffett’s original 90/10 model dedicates a portion to short-term Treasury bills for stability. The NEOS Enhanced Income 1-3 Month T-Bill ETF (CSHI) offers an income-enhanced alternative for this allocation. CSHI primarily invests in one-to-three-month U.S. Treasury bills, providing a base of highly liquid, low-risk government debt. To augment income, it incorporates a data-driven put spread strategy utilizing SPX index options.
Post its 0.30% expense ratio, CSHI currently provides a 4.71% distribution rate, with monthly payouts. Investors must understand that CSHI is not a direct substitute for a pure Treasury bill investment. The embedded options strategy introduces additional market risk. During periods of sharp equity market declines, CSHI could experience losses, a scenario largely avoided by a traditional T-bill ETF. Nevertheless, the strategy has demonstrated encouraging results: over the past three years, CSHI delivered a 5.43% annualized net asset value total return, surpassing the Bloomberg U.S. 1-3 Month Treasury Bill Index’s 4.74% return.
Constructing the High-Yield Portfolio
By adopting a 90% allocation to SPYI and a 10% allocation to CSHI, this alternative portfolio structure aims to achieve a weighted average distribution yield of approximately 11.26%. It’s crucial to acknowledge that these yields are dynamic and subject to fluctuations based on option premiums, prevailing interest rates, and the underlying performance of the portfolio’s components. Investors should anticipate that this income-centric version of Buffett’s 90/10 portfolio may underperform his original recommendation in terms of long-term capital appreciation, particularly during strong bull markets, due to the income-generating strategies inherently capping some upside potential. Additionally, both SPYI and CSHI carry higher expense ratios than simple passive index funds.
However, for investors whose primary financial goal is consistent income generation over maximizing capital growth, this adapted strategy offers an attractive solution. It provides broad exposure to both the S&P 500 and short-term Treasuries, but with the active management of options strategies outsourced to professional fund managers, eliminating the need for individual investors to manage complex covered calls themselves.
Frequently Asked Questions
What is Warren Buffett’s traditional 90/10 portfolio?
Warren Buffett’s original 90/10 portfolio allocates 90% to a low-cost S&P 500 index fund for growth and 10% to short-term U.S. Treasury bills for liquidity and safety. Its primary objective is long-term capital appreciation, not income.
How do the NEOS ETFs (SPYI, CSHI) generate high income?
SPYI generates income by combining a portfolio of large-cap U.S. stocks with an actively managed strategy involving both buying and selling SPX index options. CSHI invests in short-term Treasury bills and adds a data-driven put spread strategy using SPX index options. Both funds aim to harvest option premiums to boost yield.
What are the main trade-offs of this high-yield 90/10 portfolio?
The primary trade-offs include potentially lower long-term capital appreciation compared to Buffett’s original strategy, higher expense ratios due to active management of options, and increased risk from the options strategies, particularly for CSHI during sharp equity market downturns.
