4 Ways to Generate Income with ETFs

Targeting Higher-Yielding Stocks

This approach has been around forever. Whether built on an index or run actively, these ETFs focus on companies that pay above-average dividends. They screen for stocks that return more of their shareholder yield through dividends rather than buybacks or share price growth.

These ETFs often tilt toward sectors like utilities, consumer staples, energy, and financials, where companies have mature business models and steady cash flows. A good example is the SPDR Portfolio S&P 500 High Dividend ETF

, which currently yields about 4.7% on a 30-day SEC basis by equally weighting the 80 highest-yielding stocks in the S&P 500.

The trade-off is a natural value bias. Dividend yield equals dividends divided by share price, so when prices fall, yields rise. This means these ETFs often load up on out-of-favor or slower-growing companies that have lagged in market performance.

Owning Pass-Through Entities

Pass-through entities include real estate investment trusts (REITs), master limited partnerships (MLPs), and business development companies (BDCs). Each type owns different underlying assets, but they share one thing in common. They avoid corporate-level taxation by distributing most of their income directly to investors.

REITs hold income-producing properties such as apartments, offices, and warehouses. MLPs own energy infrastructure like pipelines and storage facilities. BDCs lend to small and mid-sized private businesses.

In ETF form, these structures provide diversification and, in many cases, monthly distributions without the complexity of K-1 tax forms. The trade-off is lower tax efficiency, as distributions are typically taxed as ordinary income with some portion treated as return of capital.

Examples include the Schwab U.S. REIT ETF

at 3.58%, the VanEck BDC Income ETF

BIZD

+0.85%

at 9.87%, and the Alerian MLP ETF

AMLP

+0.87%

at 8.55%.

Taking On Credit Risk

With bonds, yield potential is directly proportional to how much default risk you take on. The concept is simple. If you lend money to a reliable borrower, you earn a modest return. If you lend to someone with a sketchier record, you demand more interest. The same logic applies to corporate paper.

As you move down the credit spectrum beyond investment grade (BBB and above), yields rise because investors require more compensation for the risk of default. But there is no free lunch. Prices can be volatile, and when defaults do happen, recovery rates are often far from complete.

A good example is the BondBloxx CCC Rated USD High Yield Corporate Bond ETF

, which targets the lowest rung of the high-yield market and currently yields about 10.66%.

CCC-rated bonds are considered “distressed” credits, where default risk is very real. Historically, the annual default probability for CCC-rated debt sits around 25% according to Moody’s, and the average recovery rate after default is roughly 40%.

That means while the yields can look enticing, investors are effectively being paid to assume substantial credit and liquidity risk. For those comfortable with volatility and drawdowns, the risk premium can be worth it—but it is not income you can treat as guaranteed.

Selling Upside with Options

Using options overlays can unlock additional income potential by selling upside, typically through covered calls or cash-secured puts. The idea is straightforward.

You earn immediate premium income by agreeing to limit your future gains. The balance between income and upside depends on three things: time to expiry, how far the option is from the current price (moneyness), and, most importantly, how volatile the underlying asset is.

A good example is the JPMorgan Equity Premium Income ETF

, which generates a 7.17% yield by selling out-of-the-money S&P 500 index calls through equity-linked notes (ELNs). Its sibling, the JPMorgan Nasdaq Equity Premium Income ETF

JEPQ

+0.43%

, does the same for the more volatile Nasdaq-100 and currently yields around 9.45%. Both use ELNs for capital efficiency, though that structure means distributions are generally taxed as ordinary income.

Newer entrants like the NEOS S&P 500 High Income ETF

use SPX index options instead, which qualify as Section 1256 contracts. That allows for a 60/40 long-term to short-term capital gains split and better overall tax efficiency. SPYI also actively harvests tax losses, so more of its distribution is classified as return of capital rather than ordinary income.

This corner of the ETF market has seen explosive growth. Beyond broad-market strategies, issuers are now rolling out single-stock and synthetic versions that use what’s called a “poor man’s covered call.” These combine long call and short puts at the same strike and expiry, with short call to mimic a covered call position without owning the stock outright.

Some advertise double- or even triple-digit yields, but investors should be cautious. Much of that payout is return of capital, and not the constructive kind—NAV erosion over time is a real risk.

Please note that this article reflects the author’s personal views and does not represent the opinions of the publication or its affiliates. It is for informational purposes only and does not constitute investment advice. It is essential to seek guidance from a registered financial professional before making any investment decisions.