As the ranks of option strategy ETFs continue to grow, it’s interesting to see which strategies fund sponsors will pick to set their ETFs apart from the crowd. The Defiance Income Target ETFs definitely follow a different approach. It will be interesting to see how they work out as they build up time in the market.

The Defiance S&P 500 Income Target ETF (SPYT) and the Defiance Nasdaq 100 Income Target ETF (QQQT) both aim to payin investors an annual 20% distribution. The two funds have portfolios that hold shares of the designated tracking ETF: SPDR S&P 500® ETF Trust (SPY) for SPYT and the Invesco QQQ Trust ETF (QQQ) for QQQT.

Every day, call options are traded on the underlying indexes (not the ETF shares). Fund managers also sell daily credit call spreads, which involve selling a call option and, at the same time, buying a call at a higher strike price. The fund managers make this statement on their website:

QQQT’s investment approach is meticulously designed to generate income through option premiums derived from selling Index call spreads, the primary driver of the Fund’s yield. We sell at-the-money or near-the-money call spreads to retain upside growth potential and aim for a target annual income level of 20%.

The managers take the same approach for SPYT.

These two ETFs are very new. SPYT launched on March 7, 2024, and since its launch, SPYT has posted a total return of 15.4%. The share price is up 0.80%, so the bulk of the gains came from dividend distributions. The fund launched nine months ago, so the 15% return is right on track for the 20% annual target. QQQT hit the market on June 20, 2024—just five months. Over that time, the fund earned a total return of 4.10% and the share price went down by 2.7%.

The returns from both of these ETFs will likely consist almost entirely of the distributions, which are targeted to pay 20% per year. In its short history, SPYT is on track to do so. With just five months in the market, QQQT has fallen short so far.

I am curious how these funds will perform in a flat-to-down market. I think both need significant market seasoning (at least a couple of years) to see if the target 20% yield idea works. to book value, not a discount. I believe RITM could be a $15.00 stock within the next year.