Why Income ETFs Are Having a Jerry Maguire Moment

In the words of the great fictional sports agent Jerry Maguire, ETF investors are asking funds to show them the money. 

As millions of baby boomers are saying goodbye to their jobs, they’re not only demanding returns from their exchange-traded funds, but income, too. Income-oriented products, such as dividend equity and covered-call funds, have been a massive driver for inflows in recent years, and the trend shows no signs of slowing down. Funds in the derivative income category, for example, have collected $33.97 billion this year through June, according to data from Morningstar. Last year, they collected $56.1 billion. Income funds could be an interesting topic for clients and an even better way for advisors to sneak in the catchphrase: Help me, help you.

“The usage of ETFs focused on either dividend-paying equities or using options to create a different income profile is only going to increase because the needs are increasing and the scarcity is also increasing from traditional assets,” said Matt Bartolini, global head of research strategists at State Street. For example, equities are highly concentrated in high-growth sectors like technology that tend to reinvest rather than pay out dividends, while bond investors have been grappling with lower policy rates and yields. 

You Had Me at Monthly Income

Income ETFs are also one of the first places investors look when they are putting money back into the market from money market funds or cash, said Todd Brighton, a senior vice president at Franklin Templeton. Plus, many investors are still skittish from the inflationary spike in 2022 and bouts of market volatility over the past few years. 

“Income strategies provide a more conservative way to re-enter markets,” he said, adding that strategies that provide income may be seen as more reliable than those that provide just price appreciation. 

JPMorgan has been leading the charge: 

• Of derivative income funds, JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) has taken the most flows this year through June with $5.99 billion, but JPMorgan Equity Premium Income ETF (JEPI) remains the largest derivative income ETF with over $45 billion in assets, according to Morningstar’s data. 
• The NEOS Nasdaq-100 High Income ETF (QQQI) and NEOS S&P 500 High Income ETF (SPYI) follow with roughly $13 billion and $10.7 billion, respectively. 

Who’s Coming With Me? Brighton says diversification is particularly important right now, since there are many asset classes that provide sources of income, and they all have their own drivers of return and risk. “Diversifying across those sources of risks and income is what can provide investors a smooth ride and consistent income experience over the market cycle,” Brighton said.