Image Source: Pixabay

Income-hungry investors have been piling into ETFs that use options to deliver juicy dividends. We've seen a surge in launches of these products recently, as providers employ innovative strategies to package derivatives within the ETF structure to meet rising investor demand.

In addition to offering high yields, these strategies generally help reduce portfolio volatility. However, investors should remember that there’s no free lunch in investing. These products tend to perform best in sideways markets and often underperform during strong bull runs. That said, they can provide some downside protection when stocks fall.

Quantitative Researcher Roni Israelov refers to these strategies as a “Devil’s Bargain.” His research shows that trading options to generate income can undermine long-term investment returns.This paper is Roni’s personal research and not a work product of Citadel.

Our own analysis of the most popular derivatives-backed ETFs also suggests that investors may be leaving significant returns on the table in their pursuit of high income. Nevertheless, these products have attracted substantial inflows this year, as market volatility has shaken investor confidence.

The JPMorgan Equity Premium Income ETF (JEPI - Free Report) uses proprietary research to select around 130 stocks and writes S&P 500 Index call options to generate income. Its top holdings include NVIDIA (NVDA), Microsoft (MSFT - Free Report) , and Meta (META - Free Report) .

JEPI and its sister fund, the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ - Free Report) , are among the top asset gatherers this year.

The Amplify CWP Enhanced Dividend Income ETF (DIVO - Free Report) aims to deliver high income from both dividends and covered calls. Its managers focus on high-quality large-cap companies with a history of dividend growth and write covered calls on individual stocks.

While DIVO has outperformed JEPI, both have significantly underperformed the S&P 500 over the long term on a total return basis.

JEPQ and the Global X Nasdaq 100 Covered Call ETF (QYLD - Free Report) continue to underperform the Nasdaq 100 ETF (QQQ - Free Report).

Running Length: 00:15:09

More By This Author:

Should You Buy Gold Or Gold Miners Now?
Quantum Computing: Tech's Next Giant Leap?
Ride Out The Market Storm With Low-Volatility ETF Strategies