High-Yield ETFs: Big Payouts, Bigger Trade-Offs?

AngelicaDigital Marketing2025-06-295960

While a substantial amount of money continues to flow into low-cost, plain-vanilla ETFs, the ETF landscape is becoming increasingly complex, with most new launches being actively managed and many employing derivatives.

Two recent regulatory changes—the “ETF Rule” and the “Derivatives Rule”—have made it easier for providers to launch ETFs and incorporate derivatives into their strategies. The explosion in derivative-backed ETFs has been particularly striking.

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Most of these new derivative-based ETFs fall into one of three categories:

Buffer or defined outcome ETFs

Leveraged or inverse single-stock ETFs

Option-based income ETFs

Some of the newest products even combine options-selling strategies with leveraged single-stock ETFs.

This article takes a closer look at ETFs that trade options on single stocks to generate exceptionally high yields—among the hottest-selling funds in the market today. Thanks to their eye-catching distribution rates, these funds are generating significant buzz on social media. However, they generally underperform the underlying stocks, even as they continue to attract assets from investors drawn to their lucrative monthly payouts.

Option Income ETFs: How the Strategy Works

YieldMax currently offers more than 50 ETFs in U.S. markets, with total assets under management of about $14 billion. Though relatively new—the oldest, TSLY, debuted in November 2022—the suite has grown rapidly, largely driven by its headline-grabbing distribution yields of 100% or more. Inspired by this success, many copycat ETFs have entered the market.

According to the provider, the primary investment objective of these funds is to seek current income; the secondary objective is to seek exposure to the price movement of the underlying stock, subject to a cap.

These funds do not actually hold the underlying stocks. Instead, they gain synthetic exposure by taking long positions in call options and short positions in put options. They also hold Treasury securities for collateral and additional income.

To generate monthly income, the fund manager sells call options against the synthetic long position. These calls typically have expirations of one month or less and strike prices about 0%–15% above the current share price. In some cases, managers use covered call spreads to further enhance yields.

The YieldMax Reddit community has around 50,000 members, many of whom discuss using these ETFs to replace their 9-to-5 jobs or to generate retirement income.

The four most popular products in the suite are linked to some of the hottest and most volatile stocks. The inherent volatility of these stocks leads to higher option premiums—and higher potential income. Each of these ETFs has gathered over $1 billion in AUM.

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Yields are calculated by annualizing the most recent monthly payout and dividing it by the fund’s latest NAV. However, yields can vary significantly from month to month, as income from selling options depends on fluctuations in the underlying stock, implied volatility, and other factors.

Another provider, Kurv Investment Management, offers six Yield Premium ETFs that use derivatives on single technology stocks to generate income. Current distribution rates range between 12% and 29%.

Like YieldMax, Kurv also uses synthetic covered call strategies to generate income, aiming to “strike a balance between income generation and potential upside capture.”

According to the provider, while some high-income ETFs experienced significant NAV erosion in 2024, their ETFs have shown “stable NAV behavior.” However, lower distribution yields have dampened investor interest in the product suite, with the most popular fund managing just over $22 million.

Performance Since Inception

We analyzed the total return—including distributions—of 24 single-stock covered call ETFs in the YieldMax suite and six ETFs in the Kurv suite from their respective inception dates versus their underlying stocks.

Many of these ETFs launched in 2023—providing a limited, yet meaningful, performance history. Despite their eye-popping distribution rates, these products tend to underperform on a total return basis due to steep declines in share price and resulting NAV erosion over time.

Of the 24 YieldMax ETFs we examined, some underlying stocks surged, some declined, and others remained relatively flat—but in every case except those tracking PayPal (PYPL) and Marathon Digital (MARA), the ETF underperformed the stock.

For the four most popular products, the performance gap was substantial—suggesting that investors may be leaving significant gains on the table in pursuit of yield.

All six Kurv Single Stock ETFs have also underperformed their underlying stocks since inception.

Since their inception, eight of these ETFs have underperformed their underlying stocks by at least 50 percentage points cumulatively, and four of them have lagged by over 100 percentage points.

YieldMax MSTR Option Income Strategy ETF (MSTY)

The most popular product in the suite celebrated its one-year anniversary in February and now boasts $4.8 billion in assets. Since inception, it has delivered a total return of 285%, while MSTR stock has surged 437% over the same period.

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