Financially engineered ETFs are hitting the market at a record pace. Among these, one category stands out as a clear favorite for investors right now: Synthetic Income.
These aren’t your standard dividend funds. These strategies take a broad-based asset class—like the NASDAQ or the S&P 500—and apply complex option overlay strategies, total return swaps, or derivative strategies to generate high income. Whether it’s covered calls or put writes, the goal is to manufacture yield where it didn’t exist before.
But with hundreds of new products flooding the zone, how do you separate the winners from the noise?
In our latest Factor Flavors / Category Spotlight video insight, I break down exactly how to use ETF Action’s tools to cut through the complexity and find the strategy that aligns with your risk profile.
The Explosion of Synthetic Income
To understand why we are focusing on this, you have to look at the numbers. At the end of 2020, the synthetic income space was virtually nonexistent, holding under $3 billion in assets.
Today? That category sits at over $140 billion.
This rapid expansion creates a challenge for advisors and investors: How do you track it? How do you categorize it?
Step 1: Proper Classification
At ETF Action, we consider Synthetic Income to be a “Non-Traditional” asset class. When you apply heavy derivatives to an equity index, it loses the characteristics of the underlying asset and takes on a new risk/return profile.
Using our Navigator Tool, we break this universe down into six underlying categories:
- Equity (Traditional covered calls/put writes)
- Single Stock (A rapidly growing segment)
- Fixed Income
- Crypto
- Commodity
- Multi-Asset
While all are growing, the Equity segment is the heavyweight champion, and where most investors start their search.
Step 2: Use the “Beta Tracker” to Narrow the Field
Once you filter for Equity Synthetic Income, you are still left with a massive list of funds. How do you distinguish between a fund tracking the broad US market versus one tracking tech growth?
This is why we assign a Beta Tracker.
By grouping funds by their Beta Tracker, you can immediately see where the assets are flowing. Currently, Large Cap Growth (tracked by IWF) and Large Cap Blend (tracked by IWB) dominate the space, holding 57% and 35% of the assets respectively.
It is important to note that IWF is used here because it represents all U.S. Large Cap Growth, capturing not just the Nasdaq-specific strategies but the broader growth segment as well. This allows you to quickly isolate the “sandbox” you want to play in. If you want tech or growth exposure with income, filter by the IWF beta tracker to see funds like JEPQ, QYLD, or QQQI side-by-side.
Step 3: Look Under the Hood (Implementation & Taxes)
Not all 10% yields are created equal. Once you have your list, you need to look at the Implementation field in our classification tab.
- Structured Products (ELNs): Funds like JEPQ often use Equity Linked Notes.
- Options Strategies: Funds like QQQI might use index covered calls.
Why does this matter? Taxes. Different implementation methods trigger different tax treatments—whether it’s qualified dividends, return of capital, ordinary income, or the favorable “60/40” tax treatment of Section 1256 contracts. Always check the implementation to understand the tax efficiency of the distribution.
Step 4: Check Your Capture Ratios
You must also assess the risk. By selling options to generate income, these funds often cap their upside. You need to analyze the Up/Down Capture ratios.
- High Up Capture: Good for those who want to participate more in market rallies.
- Low Down Capture: Essential for those looking for downside protection.
Ideally, you are looking for a positive differential—a strategy that captures more of the upside than it suffers on the downside.
Step 5: Define Your Target Distribution
Finally, you have to ask yourself: What is your actual income goal? Some funds are pure income plays designed to maximize payout, while others aim for a “nice” yield but prioritize price appreciation.
To figure out which is which, you need to look closely at the data on our Distributions & Taxes page. Pay attention to the difference between these two metrics:
- Indicated Yield: This is a forward-looking snapshot. It takes the most recent distribution and multiplies it by the frequency (Last Distribution × Frequency). This tells you what the fund is paying right now.
- Trailing Twelve Month (TTM) Yield: This sums up every distribution actually paid over the last year.
Comparing these two numbers gives you a sense of the fund’s consistency and whether their payouts are trending up or down. Use these data sets to align the product with the specific results you are trying to capture in your portfolio.
Step 6: The Final Due Diligence
While data is powerful, it doesn’t replace the need to read the fine print. Although I didn’t mention it in the video, the absolute last step should always be to review the issuer’s collateral and prospectus.
You need to understand the nuances of the strategy completely—what triggers the option writing, how the collateral is managed, and the specific risks involved. Our goal at ETF Action isn’t to replace this step, but to help you get to it faster. Instead of reading 50 prospectuses, our tools help you filter the market down to the two or three that truly matter, so you can focus your time on the deep dive where it counts.
The Bottom Line
The Synthetic Income market is large, complicated, and growing every day. Don’t fly blind.
- Identify the Asset Class (Equity, Crypto, etc.)
- Filter by Beta Tracker (Know your underlying exposure)
- Check Implementation (Understand the tax implications)
- Analyze Risk (Up/Down Capture)
- Review Distributions (Indicated vs. TTM Yield)
- Read the Prospectus (Validate the strategy details)
If you haven’t already, create a free account at ETF Action. All the tools I demonstrated in the video—from the Navigator to the Classification tabs—are available to help you make smarter, data-driven decisions.
Disclosures
This material is for informational purposes only and should not be considered investment advice. All investments, including ETFs, involve risk, including the possible loss of principal. Investors should consider their investment objectives, risks, charges, and expenses carefully before investing.
This analysis was developed by the team at ETF Action. We leverage advanced AI tools to assist in the drafting and refinement of our content, based on our expert prompts, direction, and final review.
