ETFs Leveraging Options Gain Popularity Among Yield-Seeking Investors

Income-focused investors are increasingly turning to ETFs that utilize options to enhance dividends. A recent surge in these products reflects providers’ innovative strategies to integrate derivatives into the ETF structure, responding to heightened investor demand.

These strategies not only promise high yields but also typically contribute to reduced portfolio volatility. However, investors should keep in mind that there is no guaranteed success in investing. Such products often excel in sideways market conditions but may underperform during robust bull markets. Nonetheless, they can offer a measure of downside protection when stock prices decline.

Expert Insights on Options-Backed ETFs

Roni Israelov, a Senior Quantitative Researcher at Citadel, characterizes these strategies as a “Devil’s Bargain.” His research indicates that using options primarily for income generation can compromise long-term investment returns. Additionally, our analysis of popular derivatives-backed ETFs suggests investors might miss out on significant returns while chasing high income opportunities. Despite this, these products have seen considerable inflows this year as market volatility has unsettled investor confidence.

Notable ETFs in the Market

The JPMorgan Equity Premium Income ETF (JEPI) employs proprietary research to select approximately 130 stocks and writes S&P 500 Index call options to generate income. Top holdings in JEPI include NVIDIA (NVDA), Microsoft (MSFT), and Meta (META).

JEPI and its counterpart, the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ), are among the top asset-gathering funds of the year.

On the other hand, the Amplify CWP Enhanced Dividend Income ETF (DIVO) aims to deliver high income through both dividends and covered calls. Its management focuses on high-quality large-cap companies known for dividend growth, writing covered calls on individual stocks.

Performance Comparison

Although DIVO has outperformed JEPI, both funds have notably lagged behind the S&P 500 in the long term. JEPQ and the Global X Nasdaq 100 Covered Call ETF (QYLD) continue to trail the performance of the Nasdaq 100 ETF (QQQ).

For More Information

To deepen your understanding of these ETFs, watch the informative video linked above.

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Microsoft Corporation (MSFT): Free analysis report
Invesco QQQ (QQQ): ETF Research Reports
Global X Nasdaq 100 Covered Call ETF (QYLD): ETF Research Reports
Amplify CWP Enhanced Dividend Income ETF (DIVO): ETF Research Reports
JPMorgan Equity Premium Income ETF (JEPI): ETF Research Reports
Meta Platforms, Inc. (META): Free analysis report
JPMorgan Nasdaq Equity Premium Income ETF (JEPQ): ETF Research Reports

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.