NEOS Real Estate High Income ETF

IYRI

Market cap $239M

Market uncertainty and elevated risks favor defensive positioning over growth-focused indices like the S&P 500 and Nasdaq-100. Because of all of this uncertainty, the overall volatility levels have increased, making option-based strategies more attractive. I see a huge merit in deploying capital into OTM covered calls, which strike the balance between defense and exposure to rich option premium income.

Today, NEOS Real Estate High Income ETF offers a high 10.9% distribution yield via a covered call strategy on U.S. REITs. IYRI's performance has outpaced passive REIT ETFs in a sideways market, but its upside is capped due to the options overlay. I expect REITs to remain range-bound in 2026, but sector rotation could shift return drivers toward price appreciation, limiting IYRI's relative advantage.

Commercial real estate investment trusts (REITs) recently tumbled, highlighting that segment's perceived vulnerability as yet another “victim” of the artificial intelligence (AI) trade, but investors' apprehension regarding select real estate stocks could evolve into a buying opportunity.

Volatility and dispersion are the likely key themes for 2026. The sky-high valuations and increasingly shaky economic/financial fundamentals support that view. At the same time, the market's "put mechanism," which has made the buy-the-dip strategy work since really the GFC, has not disappeared.

REITs have significantly underperformed, delivering sub-5% annual returns that barely outpace inflation over the past five years. Persistent elevated long-term yields are the key driver of REIT underperformance, outweighing any short-term rate cuts by the Fed. I see odds of a REIT turnaround as below 50%, given structural yield pressures and limited inflation-hedging effectiveness.

The market seems to be increasingly punctuated by notable volatility spikes, while the broad indices (and AI names) struggle to justify their valuations. This is the necessary setup for covered call ETFs to come in and shine. However, there is a huge caveat (not that visible risk), which, if not properly considered, might lead covered call investors to be disappointed.

Neos Real Estate High Income ETF offers a compelling double-digit yield and monthly, tax-advantaged distributions, making it attractive for income-focused investors. IYRI's covered call strategy generates income but caps upside potential, differentiating it from individual REITs with greater long-term appreciation prospects. The ETF's portfolio includes both high-quality equity REITs and riskier mREITs, increasing exposure to commercial real estate headwinds.

Broadly speaking, real estate investment trusts (REITs) and the related ETFs didn't do much worth writing home about this year, but there's optimism these income-generating assets are in store for better showings in 2026.

Covered call ETFs promise high income and outperformance in sideways or declining markets, but face opportunity cost in bull markets. Despite strong AuM growth and new launches like NEOS MLP & Energy Infrastructure High Income ETF (MLPI), Covered Call ETFs are structurally suboptimal with inherent negative alpha. Covered call ETFs consistently underperform not only in rising markets due to capped upside, but also during market declines.

This week's Undercovered Dozen highlights 12 lesser-followed stocks and funds, each with distinct catalysts or value opportunities. This week's edition covers articles published between Dec. 12 and Dec. 18, offering fresh investment ideas. The series aims to inspire discussion and help investors discover overlooked opportunities in the market.