Peak Spend & Save
Bitcoin bets and real estate rents form the summit of the STSR mountain.
Congratulations! You've made it to the top of Spending and Saving Mountain. You learned where to keep your cash in Tier One, how to stack up Cashback with the right Credit and Debit cards, how corporate bonds can quietly pay your bills in Tier Two, and we even dove into the complicated yet profitable covered call strategies in Tier Three that all together power the Short Term Strategic Reserve (STSR): my savings portfolio aiming to deliver a blended yield of 10 to 12 percent while building a cash reserve that grows on its own.
Last week in Cash Flow Without the Cubicle, SPYI and QQQI formed the backbone of Tier 3, providing steady income to supplement lower-yielding cash, T-bills, and corporate bonds. But there's still one more peak to climb. Enter Tier 3.5, the experimental slice of the portfolio. A short climb with a big reward, it delivers a high yield from a modest allocation.
Not Just Another Rent Check
Last week, I discussed Next Evolution Options Strategies (NEOS) and their two flagship funds. But they also offer another fund that complements what SPYI and QQQI already provide.
IYRI works much the same way, writing tax-efficient 1256 index covered call options (which the IRS taxes as 60 percent long-term and 40 percent short-term gains, no matter how long you hold them) on the Dow Jones U.S. Real Estate Capped Index, which tracks real estate investment trusts (REITs). REITs are companies that own or operate real estate such as apartments, shopping centers, or office buildings, and pass most of their rental income back to investors. IYRI sells out-of-the-money calls on those REITs, paying out around 11 to 12 percent a year (roughly 1% or $0.50 per share per month). REITs also have a special tax status that requires them to return most of their profits to shareholders as dividends. That means about 25% of IYRI's distributions come from dividends paid by the underlying REITs, while the other 75% comes from the options strategy. That mix helps balance the portfolio, since rent income tends to be steadier than stock prices.
Buffett's Gonna Kill Me*
Yes, Bitcoin. Yes, that Bitcoin—the extremely volatile asset that's supposedly "based on nothing" but somehow keeps climbing. Buffett once called it 'rat poison squared.' Warren, please look away.
BTCI, another NEOS fund, capitalizes on Bitcoin by owning the VanEck Bitcoin Trust (HODL), an ETF that actually holds Bitcoin. It then layers on a synthetic strategy (buying calls and selling puts to mimic holding Bitcoin without actually owning it). Then it sells an additional covered call for income. The result: an annualized yield around 28%, with the fund paying close to $1 per share per month (often more), or about 2.5% monthly. Of course, when Bitcoin crashes—as it did in 2022, dropping 60%—BTCI gets knocked out too.
BITO, meanwhile, is the OG Bitcoin futures ETF from ProShares. It also doesn't hold Bitcoin directly; instead, it trades Bitcoin futures (contracts made to buy or sell Bitcoin at a predetermined future price). The payoff? An eye-popping 50%+ yield that changes faster than a freshman switching away from an accounting major.
The Upside…
Even though Bitcoin exposure is just under 9% of my STSR and real estate barely 6%, these funds together deliver over 38% of the portfolio's income. Bitcoin-related funds alone provide 32% of total income. In other words, a small allocation pulls far more than its weight.
BTCI and IYRI are also relatively tax-efficient, with about 95% of their distributions classified as return of capital, according to NEOS.
…and the Downside
Bitcoin's volatility is no joke. A 50% drop in price would drop my portfolio value by 5% and would likely cut my STSR's income by over 15%. Still, in the meantime, I'll happily collect those oversized payouts. The reward outweighs the risk—at least for now. Additionally, BITO distributes income that is taxed as ordinary income, making it less tax-friendly. But the sheer size of its yield makes it easy to ignore the tax drag.
The Bottom Line
These three funds are the most confusing and least straightforward parts of my STSR, but they make up for it with income (and, in some cases, tax efficiency). Stability and liquidity? Not so much. But that's the tradeoff.
Still, the L.I.S.T. principles hold: Liquidity, Income, Stability, and Tax Efficiency all pull together across the tiers to create a portfolio that boosts income, keeps cash accessible, and minimizes the tax bill, all while maintaining a reasonably steady portfolio value.
Thanks for climbing this mountain with me. As I close out the Spend and Save series, I encourage you to keep looking for what makes the most sense in your own financial journey. Stay tuned, the next series is right around the corner.
*Topics discussed are highly volatile and extremely complex. Please do your own research before considering purchases of these funds.