High-yield ETFs using covered call strategies have become hot investments. Assets in this type of fund have grown tenfold over the last few years, with new option strategy funds launched every week.

In February, we launched the ETF Income Edge service to provide understandable research and recommendations in the new world of covered call ETFs. We initially researched a couple of ETFs that employ a unique options strategy to pay 5% per month in dividends.

Unfortunately, these ETFs (which are very new in the market) have not performed well and were the first entry on my “Do not buy” list.

Defiance ETFs manage three funds that use a put-write strategy. The funds are:

·         Defiance S&P 500 Enhanced Options Income ETF (JEPY)

·         Defiance R2000 Enhanced Options Income ETF (IWMY)

·         Defiance Nasdaq 100 Enhanced Options Income ETF (QQQY)

The three ETFs launched in September 2023. The investment strategy is to sell 0DTE (zero days to expiration) put options to generate cash income of 0.25% per day. Some math tells us this works out to 5% monthly dividends and a 60% annual yield. That’s a very attractive proposition if the fund managers can make it work.

When any stock or ETF pays a dividend on the ex-dividend date, the share price drops by the dividend amount. With these funds paying 5% each month, you get a big drop on the ex-dividend date. With these three particular funds, the expectation is that after the 5% dividend drop, the share price will recover over the next month. The stock price chart should look like a horizontal zigzag.

Unfortunately, these three ETFs’ big dividends have resulted in a steady erosion of the share price, and they are down 20% to 25% since they launched. Each fund has paid eight dividends, so more than half of the cash income has been offset by share price declines.

Here is the chart of one of the funds, and you can easily see the stair-stepping lower:

Also, a 5% dividend on a share price down 25% means the dividend will be 25% smaller than it was in the fall.

I believe the fund manager set too big of an income target of 5% per month. I suspect they will dial back that goal; at a lower cash dividend goal, the share prices will be much more stable.

I monitor these ETFs and dozens more for my ETF Income Edge service subscribers. Most of these funds are months to a couple of years old. As track records develop, I see how well the targeted option strategies perform. The three Defiance funds have disappointed, and I put them on the “Do not buy” list.

Defiance has another 0DTE fund using call options with a 20% yield target. That fund is highlighted in this month’s ETF Income Maximizer issue.