In this article, we discuss 10 derivative income ETFs to invest in. If you want to skip our detailed analysis of derivative income ETFs and our first five picks, go directly to 5 Derivative Income ETFs to Invest In.
Derivative income ETFs are a type of exchange traded fund that leverages derivative instruments like futures and forward contracts, swaps, and options to bet on the price movement of the underlying assets.
Why Choose Derivative Income ETFs?
In an increasingly volatile market, investors who would like to stay in the market while having downside protection are particularly interested in derivative income ETFs. Simplify ETFs CEO and co-founder Paul Kim joined CNBC, explaining that derivative ETFs allow investors to gain exposure to hedge fund-like strategies which are usually associated with large institutional investors. These ETFs provide access to OTC derivatives, well-constructed portfolio leverage, and systematic strategies.
Derivative ETFs employ strategies like options overlay, which includes both calls and puts, giving non-linear exposure to the stock market. This helps enhance upside potential and hedge downside risk. When markets rally strongly, the calls allow for high returns, and during significant market selloffs, the puts go a long way to protect a portfolio. In the current market, bonds are insufficient for portfolio diversification, whereas direct hedges using options are impactful.
Derivative income ETFs allow exposure to large-cap dividend paying companies and offer a steady income despite market volatility, since underlying options and futures hedge against rising interest rates, stock market fluctuations, and inflationary pressure. These ETFs provide access to a diversified basket of income stocks like Microsoft Corporation (NASDAQ:MSFT), Chevron Corporation (NYSE:CVX), and Apple Inc. (NASDAQ:AAPL).
Our Methodology
We selected popular derivative income exchange traded funds that deliver solid yields, apply diversified alternative investment strategies, and closely follow the annualized returns of their benchmarks. We also ensured that most of the chosen exchange traded funds held quality stocks that are popular with elite hedge funds and have a rich dividend history.
10 Derivative Income ETFs to Invest In
10. ZEGA Buy and Hedge ETF (NYSE:ZHDG)
ZEGA Buy and Hedge ETF (NYSE:ZHDG) is an actively managed exchange traded fund that seeks to provide exposure to the large-cap US equity market, while mitigating overall market downside risk in the event of a major market correction through innovative hedging strategies. ZEGA Buy and Hedge ETF (NYSE:ZHDG) holds a mix of S&P 500 index options, in addition to fixed income or other income generating securities. The ETF was launched on July 6, 2021, and its net assets amounted to $111.64 million as of February 25, 2022. The ETF delivers a 30-day SEC yield of 2.53%.
The underlying dividend stocks may experience losses, but ZEGA Buy and Hedge ETF (NYSE:ZHDG) attempts to cap those losses at 10% via its investments in purchased put options. An underlying stock in the portfolio of ZEGA Buy and Hedge ETF (NYSE:ZHDG) is Lumen Technologies, Inc. (NYSE:LUMN), a Louisiana-based technology and communications company that offers network services, security, cloud solutions, voice, and managed services.
Lumen Technologies, Inc. (NYSE:LUMN) is a popular stock among elite hedge funds. At the end of Q4 2021, 39 hedge funds were bullish on Lumen Technologies, Inc. (NYSE:LUMN), up from 25 funds in the quarter earlier.
On February 24, Lumen Technologies, Inc. (NYSE:LUMN) declared a quarterly dividend of $0.25 per share, in line with previous. Offering a forward yield of 10.28%, the dividend is payable on March 18, to shareholders of record on March 8.
In addition to Microsoft Corporation (NASDAQ:MSFT), Chevron Corporation (NYSE:CVX), and Apple Inc. (NASDAQ:AAPL), Lumen Technologies, Inc. (NYSE:LUMN) is a notable dividend paying stock.
Here is what Longleaf Partners Small-Cap Fund Commentary had to say about Lumen Technologies, Inc. (NYSE:LUMN) in its Q4 2021 investor letter:
“Lumen (39%, 4.22%; 3%, 0.38%), the global fiber company, was the top absolute and relative contributor for the year. CEO Jeff Storey took two actions this year to substantially increase the business’s value and address the stock’s enormous discount (it trades below 35% of our appraisal value). First, during the third quarter, Lumen sold its Latin American fiber for a good price (9x EBITDA) and the weaker half of its US consumer business for an encouraging 5.5x EBITDA. Both multiples came in above our appraisals and demonstrate how cheap the consolidated Lumen RemainCo is today at less than 6x P/FCF and EV/EBITDA. The majority of Lumen’s remaining EBITDA comes from its US Enterprise and SMB segments, which grow faster than Lumen’s disposed LatAm fiber and are worth higher multiples. The weakest segment of the new Lumen, the western half of Consumer, is superior to the assets the company just sold for 5.5x EBITDA. Second, Storey quickly repurchased 7% of Lumen’s shares, adding meaningfully to value per share and free cash flow per share. When the dispositions close, proceeds will reduce debt meaningfully, putting net debt right at the company’s leverage ratio target even though that target was based on the prior, inferior business mix. We are pleased that our engagement since filing an amended 13D helped the company begin to deliver positive corporate actions. The market has fixated on the potential for another dividend cut, but Lumen’s FCF is more than sufficient to cover the $1/share payout while investing aggressively into high-return, edge-out capex to grow revenues.”
9. Amplify CWP Enhanced Dividend Income ETF (NYSE:DIVO)
Amplify CWP Enhanced Dividend Income ETF (NYSE:DIVO) is an actively managed exchange traded fund that invests in top quality large-cap dividend companies, along with a tactical covered call strategy on individual stocks. Amplify CWP Enhanced Dividend Income ETF (NYSE:DIVO) attempts to provide high levels of total return on a risk-adjusted basis. As of January 31, 2022, the ETF offers an annual dividend yield of 4.70%, and distributions to shareholders are made monthly. The 30-day SEC yield is 1.30%.
Amplify CWP Enhanced Dividend Income ETF (NYSE:DIVO) owns 20-25 stocks, which are selected on the basis of market capitalization, performance, earnings, cash flow, and return on equity, with securities belonging to the 10 S&P sectors.
One of the top holdings of Amplify CWP Enhanced Dividend Income ETF (NYSE:DIVO) is Chevron Corporation (NYSE:CVX), a multinational oil and gas corporation. The company is increasing in popularity among institutional investors. In the fourth quarter of 2021, 53 funds held long positions in Chevron Corporation (NYSE:CVX), up from 51 funds in the preceding quarter. Warren Buffett’s Berkshire Hathaway is the biggest Chevron Corporation (NYSE:CVX) stakeholder as of Q4 2021, with 38.2 million shares worth $4.4 billion.
On January 26, Chevron Corporation (NYSE:CVX) reported a $1.42 per share quarterly dividend, a 6% increase from its earlier dividend of $1.34. The dividend is payable on March 10, to shareholders of record on February 16.
Here is what Goehring & Rozencwajg Associates had to say about Chevron Corporation (NYSE:CVX) in its Q3 2021 investor letter:
“After successfully replacing 25% of Exxon’s board of directors despite owning just 0.02% of the outstanding equity, Engine No. 1, the climate-focused activist hedge fund, met with Chevron’s management late last summer. In discussions that were later described as “cordial,” Chevron executives shared their plan to reduce carbon emissions. Subsequently, Chevron announced new plans to further reduce carbon output, along with their intention to appoint a new director with “environmental expertise.” Although it remains unclear exactly what Engine No. 1 is planning, rumors suggest the fund has contacted other investors, strongly suggesting they intend to launch a second campaign in the not-too-distant future.
What should Chevron expect?
It was recently reported by The Wall Street Journal that Exxon was considering abandoning two massive natural gas projects: the 75 trillion cubic foot (tcf ) Rovuma LNG project (capital cost $30 bn) and the 5 tcf Ca Voi Xanh offshore-Vietnam gas project (capital cost $10 bn). Exxon board members (most likely including the three supported by Engine No. 1) have publicly expressed concerns about both projects. According to internal reports, these projects are among the highest CO2 producers in Exxon’s pipeline; it is no surprise these projects have been called into question. However, we find the plight of both fields to be perplexing since production would almost certainly be used to displace coal in electricity generation, cutting CO2 emissions by nearly 50%. This fact seems to be lost on the new Exxon board members.”
8. Eaton Vance Risk-Managed Diversified Equity Income Fund (NYSE:ETJ)
Eaton Vance Risk-Managed Diversified Equity Income Fund (NYSE:ETJ) invests in individual stocks and buys out-of-the money, short-dated S&P 500 Index put options, while selling out-of-the-money S&P 500 Index call options of the same term, with roll dates that are staggered across the options portfolio.
The investments are focused on the information technology, financials, healthcare, consumer discretionary, industrials, energy, utilities, telecommunication services, and materials sectors. Eaton Vance Risk-Managed Diversified Equity Income Fund (NYSE:ETJ) pays out dividends on a monthly basis, with a distribution rate at NAV of 9.53% as of February 25, 2022.
The biggest holding in Eaton Vance Risk-Managed Diversified Equity Income Fund (NYSE:ETJ)’s portfolio is Microsoft Corporation (NASDAQ:MSFT), one of the Big Five American tech companies. Microsoft Corporation (NASDAQ:MSFT) is one of the top tech dividend stock picks of elite investors. As of December 31, 2021, 262 hedge funds were bullish on Microsoft Corporation (NASDAQ:MSFT), up from 250 funds in the previous quarter. Fisher Asset Management held the leading stake in the company, with 26.8 million shares worth more than $9 billion.
On December 7, Microsoft Corporation (NASDAQ:MSFT) declared a quarterly dividend of $0.62 per share, in line with previous. The dividend is payable on March 10, to shareholders of record on February 17.
Here is what Alger Spectra Fund had to say about Microsoft Corporation (NASDAQ:MSFT) in its Q4 2021 investor letter:
“Class A shares of the Alger Spectra Fund underperformed the Russell 3000 Growth Index during the fourth quarter of 2021. Microsoft Corp. was among the top contributors to performance. Microsoft is a Positive Dynamic Change beneficiary of corporate America’s transformative digitization. Microsoft’s CEO believes technology spending as a percent of GDP is likely to jump from about 5% today to 10% in a few years and that Microsoft will continue to take market share Microsoft’s enterprise cloud product, Azure, is rapidly growing and accruing market share. Microsoft Corporation (NASDAQ:MSFT) reported that Azure grew 50% in the past quarter. This high unit volume growth is a primary driver of the company’s higher share price, but strong operating execution has enabled margin expansion that has also helped to increase forward earnings estimates. We believe Microsoft’s subscription-based software offerings and cloud computing services have a durable growth profile because they enhance customers’ growth initiatives and help them to diminish costs. Additionally, investors appreciate Microsoft’s strong free cash flow generation and its return of cash to shareholders in the form of dividends and share repurchases.”
7. Global X NASDAQ 100 Covered Call ETF (NASDAQ:QYLD)
Global X NASDAQ 100 Covered Call ETF (NASDAQ:QYLD) offers exposure to covered call and buy-write strategies, where the ETF buys stocks in the Nasdaq 100 Index and writes or sells corresponding call options on the same index. The exchange traded fund tracks the performance of the Cboe Nasdaq-100 BuyWrite V2 Index. Global X NASDAQ 100 Covered Call ETF (NASDAQ:QYLD) delivers a distribution yield of 13.23% as of February 24, and the dividend is paid out to investors monthly.
The top holding of Global X NASDAQ 100 Covered Call ETF (NASDAQ:QYLD) is Apple Inc. (NASDAQ:AAPL), a California-based Big Five tech firm that designs and sells smartphones, personal computers, tablets, wearables, and accessories to customers worldwide.
Apple Inc. (NASDAQ:AAPL) declared on January 27 a $0.22 per share quarterly dividend, in line with previous. The dividend was payable on February 10, to shareholders of record as of February 7.
According to the Q4 database of Insider Monkey, 134 elite funds were bullish on Apple Inc. (NASDAQ:AAPL), up from 120 funds in the prior quarter. The collective value of the Apple stakes held by smart investors in the fourth quarter of 2021 was $186 billion. Adage Capital Management is a significant shareholder of the company, with 16.50 million shares worth roughly $3 billion.
Here is what Alger Spectra Fund had to say about Apple Inc. (NASDAQ:AAPL) in its Q4 2021 investor letter:
“Apple is a leading technology provider in telecommunications, computing and services. Apple’s iOS operating system is the company’s unique intellectual property and competitive strength. This software drives tight engagement with consumers and enterprises, fostering the growing purchases of high-margin services like music, apps and Apple Pay. Apple’s quarterly earnings exceeded street estimates on strong margin realization driven by a sales mix of more profitable services. The margin strength was even more impressive given significantly higher freight costs and supply constraints that prevented approximately $6 billion in revenue realization.”
6. Aptus Collared Income Opportunity ETF (BATS:ACIO)
Aptus Collared Income Opportunity ETF (BATS:ACIO) owns a diversified portfolio of 50 large-cap stocks, and mitigates risk by owning put options on a broad-based market index while pursuing income by selling covered-calls on the underlying basket of stocks. The fund distributes dividends quarterly and has an expense ratio of 0.79%.
A significant holding of Aptus Collared Income Opportunity ETF (BATS:ACIO) is AbbVie Inc. (NYSE:ABBV), which manufactures and sells pharmaceuticals worldwide. AbbVie Inc. (NYSE:ABBV) prepares drugs for therapeutic focus areas like immunology, oncology, neuroscience, and virology.
Among the hedge funds tracked by Insider Monkey, 82 funds were bullish on AbbVie Inc. (NYSE:ABBV) at the end of December 2021, with combined stakes amounting to $3.74 billion. Orbis Investment Management held a significant stake in the company, with more than 3 million shares worth $324.3 million.
On February 17, AbbVie Inc. (NYSE:ABBV) declared a per share quarterly dividend of $1.41, in line with previous. Offering a forward yield of 3.89%, the dividend is payable on May 16, to shareholders of record on April 15.
AbbVie Inc. (NYSE:ABBV) is a top choice of institutional investors when it comes to reliable income stocks, much like Microsoft Corporation (NASDAQ:MSFT), Chevron Corporation (NYSE:CVX), and Apple Inc. (NASDAQ:AAPL).
Here is what Miller Howard Investments had to say about AbbVie Inc. (NYSE:ABBV) in its Q3 2021 investor letter:
“While optimistic about a recovery, we continue to balance our cyclical holdings with dividend-payers in stable, less economically-sensitive industries. We hold three pharmaceutical companies, (which includes) AbbVie (ABBV). All three have strong cash flows and balance sheets, making their high dividends reasonably safe. The investment controversy surrounding these pharma companies is whether they can develop or acquire new products to replace their current blockbuster drugs. The low valuations on these stocks reflects what we believe to be undue pessimism by investors on the prospects for new drugs.”
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Disclosure: None. 10 Derivative Income ETFs to Invest In is originally published on Insider Monkey.
