High-yield, option strategy ETFs have become hugely popular. The number of new ETFs launched in recent years is staggering. I maintain a tracking system for this type of fund, and the number on my list has grown 300% to 120 since the start of 2024.
Covered call ETFs are available with a wide range of underlying assets, including stock indexes, portfolios covering specific sectors or themes, commodities, and cryptocurrencies.
If you have traded options, you know there are basically an unlimited number of ways to set up a trade, depending on your goals. These new ETFs allow you to get the benefits of options trades without ever actually having to trade options yourself, it’s just like buying any other ETF for your portfolio.
To analyze one of these ETFs, you need to determine the underlying asset and then analyze the chosen option strategies and tactics.
Many great option strategy ETFs pay high yields. The recommended funds in my ETF Income Edge service have yields ranging from 12% up to 75%. These ETFs are performing very well for my newsletter subscribers and conservative investors in general.
However, there are some dogs in the high-yield ETF world. Let’s look at three to avoid.
The SoFi Enhanced Yield ETF (THTA) owns Treasury Bills and Notes, which provide a very stable underlying portfolio. The fund managers sell both S&P 500 put and call spreads simultaneously to boost the THTA yield from the 4% paid by Treasuries to a targeted 12% distribution yield.
A stable share price and a 12% yield sound pretty good. Unfortunately, the options strategy used by the THTA managers is prone to significant losses when stock market volatility spikes. When that happens, the THTA share price crashes and does not recover. The share price history chart tells the story.
The Volatility Premium Plus ETF (ZVOL) pays dividends through the monetization of premium in the volatility index (VIX) futures term structure. The Volatility Shares website shows a distribution rate of 45.93%. Unfortunately, over the last 12 months, the share price has fallen by 45.91%, resulting in a negative 25.97% total return. Negative!
In my experience, ETFs that attempt to manage VIX futures for income often encounter difficulties.
The Westwood Salient Enhanced Midstream Income ETF (MDST) does an options overlay on an actively managed portfolio of midstream and MLP energy infrastructure companies.
MDST has a current distribution yield of 10%. The fund has performed well, producing a total return of 20.24% since its launch on April 8, 2024.
My negativity about MDST stems from the fact that energy midstream investments offer attractive yields without requiring a covered call options overlay. My preferred ETF, the InfraCap MLP ETF (AMZA), yields nearly 8% and has been growing its dividend by 9% or more per year. Over the last three years, AMZA returned 92.4% to investors and 285% in the previous five years.
Selling call options puts too much of a cap on potential capital gains in the midstream sector.
Here is the AMZA five-year chart:
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