If you have a long-term focus and you also want high yields, it’s a good idea to look into the ProShares Russell 2000 High Income ETF (BATS:ITWO), iShares 20+ Year Treasury Bond BuyWrite Strat ETF (BATS:TLTW), and Westwood Salient Enhanced Midstream Income ETF (NYSE:MDST).
When you see a yield pushing above 9%, your first reaction should be skepticism. History shows that dividend stocks and ETFs paying near double-digit yields are actually distressed and end up underperforming. However, there are always outliers you can look into.
Dismissing every high-yield option means missing legitimate opportunities for meaningful passive income. A select group of exchange-traded funds has cracked the code on generating substantial yields without resorting to financial engineering that is destined to collapse.
These ETFs have exposure to long-term tailwinds and can both outperform the market while giving you solid dividend yields without taking on excessive risk.
They’re also well-positioned ahead of more interest rate cuts later this year.
ProShares Russell 2000 High Income ETF (ITWO)
ITWO targets high monthly income from small-cap U.S. stocks while aiming for long-term total returns comparable to the Russell 2000 Index. It tracks the Cboe Russell 2000 Daily Covered Call Index before fees and expenses. You get a long position in the Russell 2000 Total Return Index and a short position in call options for additional income.
ITWO is newer and is more well-positioned than many other covered call ETFs due to the number of stocks it has exposure to, plus the upside potential of Russell 2000 stocks. Smaller-cap stocks have been underperforming for a while. Interest rate cuts are re-energizing these stocks, with the index performing strongly over the past few months.
Moreover, ITWO’s “daily reset” approach contrasts with traditional covered call ETFs, which sell monthly options and often cap upside more severely in bull markets. ProShares claims ITWO’s method generates higher income efficiently while better capturing upside over time, potentially aligning long-term returns closer to the unhedged Russell 2000.
ITWO has an 11.37% yield and distributes dividends monthly. The expense ratio is 0.55%.
iShares 20+ Year Treasury Bond BuyWrite Strat ETF (TLTW)
TLTW tracks the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT | TLT Price Prediction) as its underlying index and then adds an income overlay on top of it. The TLT itself carries high yields at 4.4%, and this additional income overlay boosts the dividend yields to 14.71%.
However, unlike traditional equity index covered call ETFs, this one does not have nearly as much risk. Bonds are safer and are unlikely to crash, especially from current levels. If anything, I see huge upside potential. If a recession or a sharp downturn happens, TLTW can give you solid upside on top of the dividend yields if interest rates are cut sharply.
The chart on TLTW does look ugly if you zoom out, but this is primarily due to interest rate hikes devaluing high-yield Treasuries. TLTW has traded a lot more positively over the past few months as interest rates have gone down. The lower the bond yields go, the higher TLTW will move.
The expense ratio is 0.35%.
Westwood Salient Enhanced Midstream Income ETF (MDST)
The Westwood Salient Enhanced Midstream Income ETF is an actively managed, non-diversified exchange-traded fund. Midstream businesses operate on a fee-based model and derive their revenues from the volume of energy flowing through their pipelines.
Thus, these businesses are some of the most stable and are very profitable. They’re very solid in the current environment, as Europe has shifted to North America for its energy demand. American exports to Europe have soared, and these pipelines are constantly in demand. Recent events surrounding Venezuela can make these businesses even more profitable, as Venezuelan oil is heavy and is perfect for U.S. refineries.
The coming years look bright for core midstream energy infrastructure companies.
MDST yields 9.03% and distributes dividends monthly. The expense ratio is 0.80%, or $80 per $10,000.
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