The universe of ETFs that use option strategies to generate income and pay very attractive distribution yields is heavily invested into technology stocks these days. Precious metals and cryptocurrencies are also well represented. One asset class that has been poorly represented in these types of ETFs is energy. That remains the case, but I want to cover two ETFs that focus on the sector.
The lack of energy-focused, high-yield ETFs isn’t that surprising. For the last few years, investors have focused on technology stocks and AI-related stocks. Fund sponsors have developed ETFs that draw investor interest. Gold and silver always have high investor interest, so there is a good selection of ETFs covering these metals. Same thing with cryptocurrencies.
However, until Ukraine started attacking Russian energy production and the war against Iran shut down the Strait of Hormuz, there wasn’t much interest in energy commodity investment choices.
Two ETFs (one is technically an ETN) offer covered call income with oil as their underlying assets. They use different option strategies, which can produce very different results depending on where oil prices go.
The ETRACS Crude Oil Shares Covered Call ETN (USOI) is sponsored by UBS. As an ETN, the notes are unsecured debt obligations of the issuer, UBS. The fund tracks the returns of an index that sells 6% out-of-the-money monthly call options on the United States Oil Fund (USO). USOI has an expected current yield (according to UBS) of 57.84%. The expected yield is calculated by annualizing the most recent three monthly dividends.
USOI will lag oil prices when they are rising rapidly. However, oil volatility leads to much larger monthly dividends. This year to date, USOI has returned 21.6%, almost all from dividends.
The Defiance Oil Enhanced Options Income ETF (USOY) uses at-the-money or in-the-money put selling to generate cash flow for dividends. The fund uses USO as its underlying asset and pays dividends weekly. The current distribution yield is 45%.
Put selling lets USOY capture more upside when oil is rising and will exacerbate losses when oil is falling. Year to date, USOY has returned 51%.
USOI and USOY offer distinct choices, depending on where you think oil prices will go. With either investment, focus on distribution yields and cash income.
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