Two Strategies Bond ETFs Can Use to Boost Monthly Income

BondBloxx CCC Rated USD High Yield Corporate Bond ETF

XCCC

-0.19%

Bond ratings provide a quick snapshot of credit quality. AAA is the highest rating, and in the U.S. corporate bond market, only Microsoft and Johnson & Johnson still carry it. U.S. Treasurys themselves are now rated AA.

Investment grade spans from A down to BBB. Below that, you enter high yield, with BB and B being the most common. At the bottom of the investable spectrum are CCC-rated bonds. A CCC rating signals serious financial stress.

Ratings agencies classify these issuers as highly vulnerable, dependent on favorable conditions to avoid default. Historical data show annual default rates for CCC bonds can run in the double digits during downturns, compared with low single digits for BB-rated bonds. In other words, defaults aren’t a possibility; they’re an expectation.

The compensation for that risk is yield. Sometimes these bonds are issued with high coupons, but more often the yield is high because the bond price has collapsed. That’s the case for XCCC, which is paying a 30-day SEC yield of 10.65%.

This is a high-risk fund. It holds 211 bonds from 133 issuers, with a 2% issuer cap to avoid outsized exposure. Most of the portfolio sits in CCC1 and CCC2, with smaller weightings in CCC3. Maturity-wise, more than half of holdings fall in the 3–5 year range.

Performance has been strong in the current bull market. A three-year annualized return of 12.16% puts XCCC among the top bond funds by total return. But remember, those figures are before taxes. As a corporate bond ETF, its monthly distributions are fully taxable as ordinary income.

iShares 20+ Year Treasury Bond BuyWrite Strategy ETF

TLTW

-1.27%

The iShares 20+ Year Treasury Bond ETF

is one of the largest and most actively traded bond ETFs in the U.S., and because of that, it carries a robust options chain with weekly strikes available. This makes it a popular vehicle for covered call strategies.

For example, an investor could buy 100 shares of TLT at roughly $89 each, for a total capital outlay of $8,900. To generate extra income beyond TLT’s 4.3% 30-day SEC yield, the investor could sell one call option contract against those shares.

Take the one-month contract TLT251024C00090000. This simply means it expires October 24, 2025, has a $90 strike price, and is a call option. Selling it nets about $0.80 in premium per share, or $80 for the contract before commissions.

On an $8,900 position, that’s about a 0.9% return for the month. Annualized, assuming you could repeat it consistently, that works out to around 11%. The trade-off is forfeiting upside beyond $90 if TLT rallies, though you keep the premium regardless.

Recognizing demand for this approach, iShares launched TLTW. The ETF automates the strategy, tracking the CBOE TLT 2% OTM BuyWrite Index (USD). As the name suggests, it sells one-month call options that are 2% out of the money on 100% of the portfolio.

The result is a very high income stream—currently an 11.3% 30-day SEC yield—though, like with any buy-write fund, it comes at the cost of capped upside.

This article is for informational purposes only and does not in any way constitute investment advice. The author may express their own opinions, which may not represent the opinions of ETF Central or its affiliated partners. It is essential that you seek advice from a registered financial professional prior to making any investment decisions.