After A Year Of Record Yields, What Is Next For Income ETFs?

A growing number of investors are seeking income from both stocks and bonds, and that has led to some new winners and experiments in the exchange-traded fund market.

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As a result of the fund's strategy of using dividend stocks and selling call options when the market fell and investors sought safety, JPMorgan Equity Premium Income ETF (JEPI) has achieved an 11% yield, making it the industry's highlight. In total, the fund manages more than $20 billion in assets.

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In spite of that, JEPI was not the only fund that was popular. In the past year, Amplify CWP Enhanced Dividend Income ETF (DIVO), which uses a covered call strategy, has received more than $1.6 billion in fund flows, whereas Schwab U.S. Dividend Equity ETF (SCHD) has received more than $13 billion in fund flows due to its equity-only approach.

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Over the past 12 months, both funds have delivered positive returns, with distribution yields comfortably above the S&P 500.

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Compared to 2022, the start of 2023 has been a different market, and some new ETFs have been introduced that offer more income opportunities for investors.

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Check out these strategies that may gain traction this year.

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International income

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In the first weeks of 2023, the international market has outperformed the U.S. in terms of income. Amplify International Enhanced Dividend Income ETF (IDVO) and Schwab International Dividend Equity ETF (SCHY) offer international versions of their yield funds. 

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While Amplify's international fund still has under $20 million in assets, it has seen $12 million in inflows since its launch in September. Over $100 million has been earned by the Schwab fund in 2023.

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“We're starting to see some legs there, partly thanks to international alpha,” said Christian Magoon, CEO of Amplify ETFs. 

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Diverse distribution schedules and currency impacts can make investing in international dividend stocks a little less predictable than investing in U.S. dividend stocks.

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“It is our goal to pass on income as it is received by the fund. Investors need to set the right expectations— making them aware that income flows may be lumpier," said David Botset, Schwab Asset Management's head of equity product management and innovation.

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Fixed income funds

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Fixed income is another area that could be profitable for investors.

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Many strategists predict the Fed's rate hikes will peak this year even after economic reports showed a resilient labor market and potentially sticky inflation.

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The central bank could cut rates, resulting in a bond market rally if investors buy high-yielding products. The relationship between bond yields and prices is inverse.

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“U.S. iShares Fixed Income Strategy head Stephen Laipply said it is a once-in-a-lifetime opportunity to de-risk and rebalance.

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Fixed-income ETFs are a much smaller market than equity ETFs, and the market is forecast to grow significantly in 2023 as new categories continue to develop. The recent launch of several collateralized loan obligations (CLOs) is a good example of this 

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In addition to multi-sector funds, active management could be another area of growth for bond funds amidst continued volatility.

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After launching in October, Capital Group U.S. Multi-Sector Income ETF (CGMS) has already crossed $80 million in assets under management and has about a 6% 30-day SEC yield.

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“Multisectors, as an example, are one of the most popular categories for mutual funds; however, they are virtually nonexistent for ETFs”, said Holly Framstedt, Capital Group's director of ETFs. 

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Other options strategies

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A combination of options and fixed-income strategies is also available on the market. 

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BlackRock's iShares launched three BuyWrite ETFs in August covering long-term Treasurys (TLTW), high-yield corporate debt (HYGW), and investment-grade corporate debt (LQDW). 

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A "higher for longer" rate environment where the Fed does not cut rates in the near future may benefit the funds, which sell call options on ETF underlying.

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“There is no doubt that we will ultimately land somewhere within the range of these numbers, so those can be very attractive to you," Laipply said. “I feel the same way about mortgages.”

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