When the subject of investing for income comes up, most people immediately think about cash flow from stock dividends or bond interest payments. The less traveled road is alternative income sourced from places like derivatives or options.

While traditional bond and equity income sources aren’t going away, there are alternative income strategies available in exchange-traded funds that can be added to help enhance an investor’s overall income stability and diversify portfolios.

Let’s examine ETF strategies that tap the power of alternative income.

The Simplify Volatility Premium ETF
When stock prices are rising and market conditions are calm, one profitable strategy is shorting U.S. stock market volatility via the VIX Index. This was popular until 2018 when volatility suddenly spiked, triggering the unexpected failure of exchange-traded notes that shorted the VIX.

Since then, the ETF industry has learned its lesson and come up with things like the Simplify Volatility Premium ETF (SVOL), an improved version of first-generation inverse VIX products.

Instead of being completely unhedged, this fund maintains deep out-of-the-money VIX call options to provide protection against the possibility of extreme VIX spikes.

Tom Psarofagis at Bloomberg Intelligence said the fund “is sort of like the PG-version of XIV”—i.e., the VelocityShares Daily Inverse VIX Short Term Exchange-Traded Note, a volatility tracking note that imploded in 2018.  

While most of today’s VIX-linked ETFs are designed to help traders capture a directional up or down move in volatility, the Simplify fund’s primary focus is generating income. It does this by selling options on the VIX and collecting the premium.  

Its distribution yield was 17.67% at the end of the second quarter. The fund pays monthly dividends and requires no filing of a K-1 (a form for income reporting by the IRS). The fund charges 0.66% annually and has around $233 million in assets.

The iShares 20+ Year Treasury Bond BuyWrite ETF
Another way to generate cash flow is by selling options on assets that produce steady income like bonds and real estate. One fund that follows this approach is the iShares 20+ Year Treasury BuyWrite ETF (TLTW), in part by owning its bigger sibling, the iShares 20+ Year Treasury Bond ETF (TLT). Besides collecting income from the latter fund’s interest payments, the TLTW fund simultaneously sells one-month covered call options to generate income.

"The whole power of the ETF market is that it's created multiple use cases for asset classes you wouldn't have thought about, said Mike Akins, a founding partner at ETF Action. The BuyWrite fund “is a put-write strategy,” he said, “and in this environment, it's generating a significant amount of income due to the volatility in interest rates."

The fund’s option adjusted yield was 22.69% as of April 25 and it pays monthly income. With around $132 million in assets, the fund charges a net annual expense ratio of 0.35%.

USCF Gold Strategy Plus Income Fund
This fund, whose ticker is “GLDX,” offers gold investors a way to monetize their position. The fund uses a multi-layer strategy by selling gold call options and by collecting collateral interest income on gold holdings. The fund also overcomes one of the biggest obstacles to investing in commodities like gold—a lack of dividend income.

Unlike one-dimensional gold funds that own physical gold only, the USCF fund has the unique flexibility to invest in physical gold or gold futures contracts. The fund's trailing-12-month yield was 3.47% as of March 31. While that might not seem high, it’s respectable considering the zero percent yield provided by most precious metals ETFs.

Using alternative income ETFs to enhance traditional income strategies is a winning strategy. Besides merely increasing a client’s potential cash flow, it diversifies their income sources, creating income stability.