That might work at the point where the spokes cross. The encoders I've seen all have a gap for the tone ring that's about 2-3mm wide. A more powerful LED might do the trick, if the receiver were properly shielded from outside light.
One downside to the encoder as opposed to a Jones is its reliance on batteries. The display and processor will take some juice to operate, and their duration is unknown.
It's going to be pretty hard to beat the Jones for size/weight and simplicity. While the encoder is theoretically capable of much greater resolution than a Jones, I'm not sure we need accuracy down to 1/512 of a wheel revolution.