Three Ways You Can Get Higher Income with ETFs

Covered call ETFs

The most popular category for generating higher monthly income is covered call ETFs, an increasingly favored strategy within the options-based ETFs category. These ETFs sell options to produce monthly income, which results in capping their upside potential while cushioning some (but not all) of the downside.

There is a substantial amount of variation within this niche. For instance, the Global X S&P 500 Covered Call ETF

delivers a high 8% distribution yield as of June 7th by selling systematic, one-month at-the-money (ATM) calls. This approach pays higher premiums but caps the upside more significantly.

Others, like the Global X Russell 2000 Covered Call ETF

, achieve even higher distribution yields of 11.8% by writing calls on a more volatile underlying portfolio. In the case of RYLD, this involves small-cap stocks, which are inherently more volatile than large-cap stocks.

The most popular ETF in this category, however, is the JPMorgan Equity Premium Income ETF

. Its popularity stems from a combination of lower fees (0.35%), the use of out-of-the-money (OTM) options (which cap the upside less), and an enticing 7.34% yield.

In summary, when you're shopping for a covered call ETF, ask yourself two main questions:

1. What is the underlying asset, and how is it selected? (e.g., active vs. index, sector vs. broad market).
2. How are the calls written? (e.g., systematically in terms of strikes and expiry dates, or tactically at the manager's discretion).

Master limited partnership (MLP) ETFs

MLPs are an alternative asset class that trades like stocks but aren't actually corporations. They operate primarily in the midstream oil and gas sector, handling the transportation, storage, and processing of energy products. This sector is known for its stable cash flows and exposure to underrepresented infrastructure assets.

However, holding MLPs directly can be problematic due to the issuance of K-1 forms. MLPs issue a K-1 because they are structured as partnerships, not corporations.

The K-1 form reports each investor's share of the partnership's income, deductions, credits, and other financial details, which can complicate tax reporting and potentially delay filing due to its late arrival.

However, holding MLPs in an ETF can avoid this hassle. For instance, the Alerian MLP ETF

provides a trailing 12-month yield of 7.3% without the need to deal with K-1 forms.

If you prefer a lower-cost option, there's also the Global X MLP ETF

with an expense ratio of 0.45%. A caveat to keep in mind: both AMLP and MLPA pay quarterly distributions, so if you need monthly income, these might not be suitable.

Senior loans

As you move down the credit quality ladder from Treasuries to investment-grade corporate bonds to junk bonds, yields tend to increase at the cost of greater default risk. However, there's an interesting exception: senior loans, which rival high-yield bonds in terms of income potential but are arguably safer.

Senior loans are typically issued by companies with lower credit ratings. But the key factor that makes them potentially safer than high-yield bonds is that they are secured. This means they are backed by collateral, often in the form of the company's assets.

In the capital structure, senior loans sit at the top, above subordinated debt and equity. This priority in the event of default means that holders of senior loans have a higher claim on the company's assets, increasing the likelihood of recovering their investment.

Another unique aspect of senior loans is that many have floating interest rates. Unlike most bonds, the interest rates on senior loans adjust periodically based on a reference rate like SOFR. This feature makes senior loans particularly attractive in a rising rate environment.

Just like other bonds, senior loans have been packaged into liquid ETFs that distribute monthly income. Some notable examples include the Invesco Senior Loan ETF

, First Trust Senior Loan Fund

FTSL

, and SPDR Blackstone Senior Loan ETF

SRLN

-0.24%

, all of which offer a 30-day SEC yield of 8% or higher.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.