Investors don’t have to look very far to find attractive yields in the bond market. But those juicy yields come at a price: Intermediate-term bond funds are in the red over the trailing one-, two-, and three-year periods. And long-term funds have performed even worse. As a result, investors may want to look elsewhere for robust yields and returns.
In this article, we will take a look at three newly launched actively managed ETFs that provide alternative sources of regular income and why you might want to consider them.
Value Investing With Dividends
Value investors maximize risk-adjusted returns by focusing on prudent risk reduction instead of growth-at-all-costs. While they don’t always perform the best during bull markets, they more than make up for the underperformance during bear markets. And value investing fingerprints are all over the list of top-performing funds of all time.
The Madison Dividend Value ETF (DIVL) combines value investing concepts with income generation. In addition to seeking out high-quality companies with strong pricing power, leading market share, significant free cash flow and low debt leverage, the fund managers look for companies trading at the high end of their relative dividend yield ranges.
Currently, the fund’s largest holdings include Cisco Systems Inc. (4.32%), EOG Resources Inc. (4.11%), Baker Hughes Company (3.74%), Chevron Corp. (3.63%) and CME Group Inc. (3.57%). With over 300 holdings, the actively managed fund offers more diversification than many high-conviction value funds, making them an easier portfolio addition.
Extra Income With Covered Calls
Value-focused Covered Call ETF
Covered calls enable investors to generate extra income from long stock positions. By selling the right to buy the underlying stock, investors collect an immediate premium that they can keep if the stock remains below the strike price. The only catch is that investors must sell the stock (or repurchase the option) if the option buyer exercises their right – limiting potential upside.
The Madison Covered Call ETF (CVRD) invests in large and mid-cap companies selling at reasonable prices in relation to their long-term growth rates. And then, under normal market conditions, the ETF writes (sells) covered call options on a substantial portion of its portfolio securities, generating extra income on top of dividends.
Currently, the fund’s long stock portfolio includes companies like Microsoft Corp. (3.71%), T-Mobile US Inc. (3.41%) and Danaher Corporation (3.20%). The managers then write out-of-the-money call options to capture upside potential and at-the-money or in-the-money call options for higher premiums and greater downside protection.
Growth-focused Covered Call ETF
The Madison Covered Call ETF offers investors a way to leverage covered calls to boost income, but the fund focuses largely on value-oriented opportunities. However, some investors may prefer to write call options against growth stocks. Since they’re more volatile, these companies could offer more income potential and possible capital gains.
The First Trust CBOE Vest Technology Dividend Target Income ETF (TDVI) invests in constituents of the Nasdaq Technology Dividend Index. With a target dividend yield of 8% over the Nasdaq 100 Index’s yield, the fund managers compare the dividend income from their portfolio to their target and bridge differences by writing (sell) index call options.
Currently, more than half the portfolio is invested in technology hardware and equipment, 28% consists of software and computer services, and 12% focuses on telecommunications service providers. As a result, investors have exposure to high-growth companies within the Nasdaq’s index while generating a compelling 8%+ target dividend yield.
Top Performing Covered Call Equity Income ETFs
| Ticker | Name | AUM | YTD Total Ret (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|
| JEPQ | JPMorgan Nasdaq Equity Premium Income ETF | $4.75B | 28.2% | 0.35% | ETF | Yes |
| QYLD | Global X NASDAQ 100 Covered Call ETF | $8.3B | 19% | 0.60% | ETF | No |
| XYLD | Global X S&P 500 Covered Call ETF | $2.97B | 10.1% | 0.60% | ETF | No |
| JEPI | JPMorgan Equity Premium Income ETF | $29B | 7.5% | 0.35% | ETF | Yes |
| DIVO | Amplify CWP Enhanced Dividend Income ETF | $2.97B | 2.7% | 0.55% | ETF | Yes |
| RYLD | Global X Russell 2000 Covered Call ETF | $1.61B | 1.7% | 0.66% | ETF | No |
Other Alternatives to Consider
Dividend stocks and covered calls are just a couple ways to generate income without bonds – but they’re hardly the only options for investors in today’s market. With interest rates on the rise, yields are plentiful, and you don’t need to take on risk to capture income.
Some alternatives to consider include:
Preferred Stock – Preferred stock combines bond-like features (fixed dividend payments) with equity-like appreciation.
Top Performing Preferred Stock ETFs
| Ticker | Name | AUM | YTD Total Ret (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|
| PFFA | Virtus InfraCap US Preferred Stock ETF | $605M | 22.1% | 1.40% | ETF | Yes |
| PFFR | InfraCap REIT Preferred ETF | $62.6M | 14.6% | 0.45% | ETF | No |
| IPPP | Preferred-Plus ETF | $11.6M | 8.4% | 1.06% | ETF | Yes |
| PFXF | VanEck Preferred Securities ex Financials ETF | $1.25B | 5.9% | 0.41% | ETF | No |
Money Market Funds – Money market funds are mutual funds that invest in cash and low-risk securities while providing high liquidity.
Top Performing Money Market Mutual Funds
| Ticker | Name | AUM | YTD Total Ret (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|
| TCRXX | American Century US Government MMkt Inv | $735M | 3.2% | 0.45% | MF | Yes |
| VMSXX | Vanguard Municipal Money Market Inv | $17.3B | 2.3% | 0.15% | MF | Yes |
| WFNXX | Allspring National Tax-Free MMkt Prem | $104M | 2.3% | 0.27% | MF | Yes |
| TBVXX | Federated Hermes Tax-Free Obl Advisor | $2.57B | 2.3% | 0.30% | MF | Yes |
| MOIXX | Federated Hermes Municipal Obl Invsmt | $3.21B | 2% | 0.89% | MF | Yes |
When choosing between these options, it’s important to lay out your goals. For instance, covered calls may be a great option if you’re not concerned about maximizing upside potential, whereas money market funds may be the best choice for investors who need near-term liquidity. And, of course, you should carefully assess each fund’s expense ratio and other characteristics.
The Bottom Line
Bonds are offering attractive yields, but their price performance has been dismal. Fortunately, investors have several compelling alternatives in today’s market, including the three newly launched funds we’ve profiled and the others we’ve discussed.