Yield-Crazed Day Traders Pony Up for ‘169%’ Option-Income ETFs

How many Wall Street buzzwords can you fit into one security? The limit is being tested by a new breed of options-fueled exchange-traded funds making inroads with the retail crowd.

Nosebleed yields. Elevated volatility. Single-stock ETFs. They all come together in a parlay of complex risk taking marketed with mundane labels like the “option income strategy,” with around $1.7 billion flowing into such products since catching on last year. Issuers are planning more. Skeptics wonder if buyers know what they’re getting into.

The ETFs are the high-octane cousin of booming option strategies that trade in volatility: Hybrid funds that hold indexes of stocks and sell derivatives against them to generate yield. Unlike their index-linked brethren, though, the new incarnations put all their chips on one company, using the ETF structure to layer multiple options trades that are sold as a one-stop, cash-spewing investment.

Fans love the payouts, and overseers say the ETFs do what they’re supposed to do: generate income. “We didn’t invent covered calls,” says Jay Pestrichelli, chief executive of Zega Financial, a sub-adviser and portfolio manager for strategies offered by YieldMax funds. “They’ve been around for decades.”

Yet critics say the complexity masks often desultory returns over time, warning the dividends can be offset by losses elsewhere, making the investment proposition a little hard to fathom.

“People see these bonkers distribution figures and start counting their riches, not realizing that there’s potentially a significant offset,” said Jeffrey Ptak, chief ratings officer at Morningstar Research Services. “There is the question of why someone would want to engage in this type of activity to begin with.”

Retail Traders Flock to Single Stock Options ETFs