Yield chasing ETFs may have jumped the shark, warns Amplify ETFs CEO

Key Concepts

• Option Income ETFs: Exchange Traded Funds utilizing options strategies to generate income, beyond traditional dividends.
• Covered Call Strategy: A specific options strategy involving selling call options against owned stock, generating income but potentially limiting upside.
• Total Return Equation: The combined return from income (dividends & options premiums) and capital appreciation.
• Yield Chase/Yield Gamble: High-yield ETF products often associated with excessive risk and unsustainable returns.
• Active vs. Passive Option Income ETFs: Actively managed funds (like DVO) select individual securities for options writing, while passive funds (like QYLD) use formulaic indexes.

The Evolution of Option Income ETFs

The speaker, Christian Mcun of Amplify, identifies approximately 10 years ago as the starting point for the rise of option income ETFs. Initially, products like QYLD, focused on the NASDAQ 100, emerged as formulaic, passively managed options income ETFs. These funds employed a basic strategy of selling options on an index. In 2016, Amplify launched DVO, marking a shift towards actively managed option income ETFs, specifically writing options on individual securities.

However, Mcun notes a period of limited investor interest persisted until around 2019. The subsequent “explosion” in popularity was driven by a broader recognition that options could be integrated as another component within the “total return equation” – moving beyond a sole focus on dividend yields. He highlights that previously, income investors in the ETF space largely overlooked the potential of options to generate income.

Lessons from Closed-End Funds & ETF Innovation

Mcun points to past experiences with covered call funds, particularly within the closed-end fund (CEF) space, as a cautionary tale. Investors had previously been “burnt” by covered call strategies that potentially sacrificed capital appreciation. He contrasts this with the ETF space, which demonstrated innovation by developing “unique solutions” not previously seen in CEFs or mutual funds, ultimately attracting investors. This innovation involved finding a “unique recipe” for balancing income generation with potential growth.

Concerns Regarding Current Market Trends

Despite his firm’s involvement in the space, Mcun expresses concern that the sector has become overheated, stating it has “jumped the shark.” He specifically criticizes the proliferation of “yield chase” or “yield gamble” branded products offering yields exceeding 100%. He points out that these funds often exhibit significantly negative total returns (down 70% in some cases), indicating unsustainable and excessively risky strategies. He emphasizes that Amplify prefers to maintain a “yield smart approach” focused on diversified exposure and balancing capital appreciation with attractive income.

The Role of Financial Advisors & Due Diligence

Mcun stresses the importance of financial advisors, like Nick Ryder of Cathmir Capital, in navigating this complex landscape. He highlights the need for advisors to conduct thorough due diligence on ETFs and, crucially, to understand their clients’ risk tolerance and investment time horizons. He acknowledges the challenge posed by the sheer number of ETFs available – nearly 5,000 – making informed selection even more critical.

The "Eye of the Needle" & Balancing Act

Mcun describes the challenge of successful option income ETF management as navigating the “eye of the needle” – a delicate balance between generating attractive income and preserving capital appreciation potential. He emphasizes that achieving this balance is “not always that easy” and requires skillful management.

Notable Quote

“Unfortunately, I believe Dom, it’s kind of jumped the shark. Now, when you see some of these yield chase or yield gamble type branded products that have over 100% yields, then you look at their total returns and they’re down 70%. I think um we’ve gone too far as an industry in some cases.” – Christian Mcun, Amplify.

Technical Terms

• Derivatives: Financial instruments whose value is derived from an underlying asset (in this case, stocks). Options are a type of derivative.
• Options Overwrite Strategy: Selling (writing) call options on stocks a fund already owns.
• Capital Appreciation: An increase in the value of an investment.
• Yield: The income return on an investment, usually expressed as a percentage.

Synthesis/Conclusion

The conversation highlights the evolution of option income ETFs from niche products to a rapidly growing segment of the market. While acknowledging the potential benefits of incorporating options into income strategies, Christian Mcun cautions against the current trend of excessively high-yield products, warning of unsustainable returns and significant risk. He underscores the importance of a balanced approach, thorough due diligence, and the crucial role of financial advisors in guiding investors through this increasingly complex landscape. The key takeaway is that while options can enhance income generation, chasing high yields without understanding the underlying risks can be detrimental to long-term investment success.