Exploring High-Yield ETFs for Income Generation and Growth

Introduction to High-Yield Dividend Stocks

In the last couple of years, high-yield dividend stocks have seen a noticeable decline as interest rates have risen. With safe investments like CDs, Treasury bills, and high-yield savings accounts offering around 5%, many investors have shifted their focus away from dividend-paying stocks and ETFs.

However, a shift in the financial landscape occurred when the U.S. Federal Reserve lowered its benchmark interest rate for the first time in four years. This decision is expected to lead to more rate cuts in the future, particularly as inflation continues to stabilize. As a result, the 10-year Treasury yield has fallen to approximately 4% and is anticipated to decrease further in the coming quarters.

Time to Reconsider High-Yield Dividend Investments

Given this change in interest rates, now is an opportune time for investors to return to high-yield dividend stocks and ETFs. This article highlights two covered-call ETFs and two municipal-bond ETFs that could bolster your portfolio and provide passive income.

Understanding Covered-Call ETFs

Covered-call ETFs have become popular because they utilize a strategy that involves selling call options on stocks already held within the fund. By doing so, these funds can earn premiums, which enhances their overall yield.

In essence, if the stock price doesn’t reach the strike price by the option's expiration date, the fund retains both the premium and its stock position. Should the stock price exceed the strike price, the fund may be required to sell the stock to the call holder unless it opts to buy back the option for a loss.

The design of these ETFs allows them to write covered calls on the stocks they own consistently, using the resulting premiums to lift their yields. If a stock is called away, the fund can repurchase it at higher prices and continue writing additional covered calls.

Market Conditions for Covered Calls

This strategy thrives in a bearish or stagnant market, where it can consistently generate income without the need for constant reinvestment into underlying securities. However, during bullish markets, covered-call ETFs may struggle to keep pace with broader indexes because of the inherent limits imposed by strike prices.

Top Covered-Call ETFs to Consider

If you're intrigued by the covered-call strategy, consider investing in two noteworthy high-yield ETFs: JPMorgan Equity Premium Income ETF (NYSEMKT: JEPI) and JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ: JEPQ). Both funds leverage equity-linked notes (ELNs) associated with covered calls, helping to minimize the tax implications typically linked with selling options.

The JPMorgan Equity Premium Income ETF offers a robust portfolio of 134 stocks and writes monthly calls on the S&P 500, while the JPMorgan Nasdaq Equity Premium Income ETF focuses on 98 stocks and similarly writes monthly calls, but on the Nasdaq-100.

Both funds provide monthly dividends, drawn from a mix of dividends generated by their holdings and premiums from their covered call strategies. The Premium Income ETF boasts a 30-day SEC yield of 8%, while the Nasdaq version achieves a yield of 12.4%, outperforming its counterpart due to its connection with higher-volatility stocks.

Exploring Municipal-Bond ETFs

Municipal bonds present another excellent avenue for generating passive income. The primary advantages of these bonds are their tax-exempt nature on both federal and state levels, depending on residency. In states with no income tax, investors can enjoy their income entirely tax-free.

Moreover, municipal bonds tend to carry lower risk compared to corporate bonds. Yet, purchasing individual municipal bonds can be complex. To simplify this process, many asset managers create ETFs that aggregate various municipal bonds. Two well-known options in this segment are the VanEck High Yield Muni ETF (NYSEMKT: HYD) and the BlackRock High Yield Muni Income Active ETF (NYSEMKT: HYMU).

Details on Municipal-Bond ETFs

The VanEck High Yield Muni ETF consists of 1,472 municipal bonds, with a low expense ratio of 0.32% and a 30-day SEC yield of 4.2%. Conversely, BlackRock's ETF features a smaller collection of 321 bonds, a slightly higher expense ratio of 0.35%, but an improved 30-day SEC yield of 4.3%. Both ETFs are currently trading near their net asset values.

Conclusion: Should You Invest?

As you consider your investment options, the JPMorgan Nasdaq Equity Premium Income ETF could be a sound choice. Several factors contribute to its appeal, including its low expense ratio and potential for dividend income.

Additionally, the volatility of the market can yield substantial returns, particularly for investors willing to adapt their strategies. High-yield ETFs can effectively diversify your portfolio while providing regular income.

Frequently Asked Questions

What are covered-call ETFs?

Covered-call ETFs are funds that enhance their yields by writing call options on stocks they already own.

Why might investors choose municipal bonds?

Municipal bonds are often tax-exempt and typically carry lower risk than corporate bonds, making them attractive for risk-averse investors.

What are the benefits of high-yield dividend stocks?

High-yield dividend stocks can provide a steady income stream, especially in times of declining interest rates.

How do covered-call ETFs perform in a bull market?

During bullish markets, covered-call ETFs may underperform compared to broader indexes due to limited upside potential from strike prices.

Can you generate passive income with ETFs?

Yes, certain ETFs are specifically designed for passive income generation through dividends and other income-enhancing strategies.

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