Your own evolving goals might point the way to a different type of exchange-traded fund
You can receive an attractive monthly income stream while lowering your risk with exchange-traded funds that use covered-call strategies.
A stock market that is rapidly climbing a wall of worry could give some people reason to pause and consider ways to protect their investments.
The S&P 500's sprint to its first record close in two months this week came despite worries about inflation and rising interest rates, volatile oil prices as the Middle East conflict continues, and concerns about financing artificial-intelligence buildout. But there is also good reason to stay invested, as earnings have exceeded expectations by enough to provide fundamental support for the market's rally.
The trick in the current environment is to address your own evolving goals as an investor. You might ask: How do I lower risk and generate a lot of income in a way that allows me to continue to participate in the stock market's growth over the long term?
Let's tackle that question.
Reducing stock-market risk while possibly riding a paradigm shift
So far this year, the S&P 500 SPX has returned 13.6%, including reinvested dividends, which is good performance when you consider that over the past 20 years through Wednesday the index has averaged an annual return of 11.5%, according to FactSet.
The S&P 500 is weighted by companies' market capitalizations, which means the index is nearly 40% concentrated in its largest 10 components. This is close to its highest level of concentration to the top 10 according to data compiled by Ned Davis Research going back to 1972.
The portfolio of the State Street SPDR S&P 500 ETF Trust SPY, which tracks the S&P 500 by holding all of its stocks, is 20% concentrated in three names: Nvidia (NVDA), Apple $(AAPL)$ and Microsoft $(MSFT)$. This isn't to say that there is anything wrong with weighting an index or portfolio by market cap. The methodology rewards success.
But so far this year the S&P 500 Equal Weight Index XX:SP500EW has outperformed the S&P 500 with a total return of 15.8%.
One reason for the recent outperformance of the equal-weighted index has been that the stocks of some of the largest tech companies have been volatile as investors have reacted sharply to management teams' guidance. For example, shares of Meta Platforms (META) fell 8% on July 30 after the company reported a 28% increase in revenue, but investors questioned whether CEO Mark Zuckerberg's plan for increasing AI capital spending can eventually boost the bottom line.
Rising long-term interest rates may also threaten stock prices. "Bond yields have risen and [companies'] forward earnings yields have declined, indicating that equities have gotten more expensive," Tim Hayes, NDR's chief global strategist wrote in a note to clients last week.
Warning: The S&P 500 just hit a new high. 'Big Short' investor Michael Burry thinks it could bring a 1987-style fall.
"The top-heavy Big Tech segment of the market is getting choppy," according to John Burrello, a senior portfolio manager for global strategies at Invesco. But he takes a more positive view when considering the likelihood that performance within the S&P 500 will continue to broaden out.
"Maybe the next AI trade is the S&P 500 companies that are not AI stocks" because these companies "have the money to buy the tokens from AI companies" that can help them improve efficiency and profitability, Burrello told MarketWatch. Tokens are the units of data and computing power that customers using Anthropic's Claude AI platform purchase, for example. "If you are a small firm, you will run out of tokens quickly," he said.
For five years through Wednesday, the cap-weighted S&P 500 returned 87%, while the S&P 500 Equal Weight index returned 56.5%. But if we look back for 25 calendar years through 2025, the equal-weighted index has outperformed the cap-weighted index during 13 of those years, with the indexes tied during one year, 2006, according to data provided by FactSet.
The S&P 500 Equal Weight Index is tracked by the Invesco S&P 500 Equal Weight ETF RSP, which was established in 2003 and has grown to $99 billion in assets under management. There are other equal-weighted funds, but they are based on other indexes, some broader than the S&P 500. So Invesco's RSP is pretty much your only way to follow an equal-weighted S&P approach with an ETF. Invesco also offers equal-weighted ETFs that track each of the S&P 500's 11 sectors.
Generating high income while lowering risk even further
The Invesco S&P 500 Equal Weight Income Advantage ETF RSPA uses a covered-call strategy to generate option premium income that is distributed to shareholders monthly. The fund holds a passively managed portfolio of stocks that tracks the S&P 500 Equal Weight Index and ladders one-month equity-linked notes daily as an overlay on the portfolio to add the options-based income.
The covered-call strategy is essentially one that gives up some of the upside of the underlying index, in return for generating income by writing covered-call options. Option premiums tend to increase as the stock market's price volatility rises and vice versa.
So if you would like to boost your investment income, this strategy is worth considering for a portion of your portfolio. There are many ways to approach covered-call income strategies. This one is rather conservative, since it is based on an equal-weighted S&P 500 portfolio.
RSPA's current distribution rate, based on the most recent monthly payout and Wednesday's closing price, is 9.17%. Its 12-month distribution rate, based on monthly payouts over the past year, is 8.82%.
A call option is a contract that allows an investor to buy a security at a particular price (called the strike price) until the option expires. A covered call option is one that you write, or sell, when you already own a security.
For example, let's say you own 100 shares of a company and the current share price is $100. You would be willing to sell the stock if it were to rise to $110. You can sell an option to another investor allowing them to buy the stock for $110 (the strike price) until the option expires. You will receive a premium for selling the option.
If the stock rises above $110 before the option expires, you will be forced to sell it for $110 no matter how high the share price has risen. If the stock doesn't rise to $110 before the option expires, you keep your premium and can write another option.
So you are giving up some upside potential in return for the income. For a much more detailed explanation of how covered-call strategies work and how fund managers use them, you can read this profile of three ETFs.
The RSPA fund has about $1 billion in assets under management. It was established in 2024. So we only have a two-year performance record, but those two years have illustrated what investors can expect from this type of strategy during a bull market. Its daily laddering strategy for essentially writing a covered-call on a small portion of the portfolio using one-month equity-linked notes is meant to help the fund capture more upside after a broad stock-market decline than it could capture if it were to take a less active trading approach.
This table shows the three ETFs. It includes one-year beta, which is a measure of volatility when compared with that of the S&P 500. So a beta of 1 would mean precisely the same price volatility of the index. The table also includes price changes and total returns with dividends reinvested. The total returns are useful for comparison, but if you are pursuing the covered-call strategy for income then you won't be reinvesting.
ETF Beta YTD total return YTD price change 1-year total return 1-year price change 2-year total return 2-year price change
State Street SPDR S&P 500 ETF 0.97 13.5% 12.9% 23.9% 22.6% 52.3% 48.8%
Invesco S&P 500 Equal Weight ETF 0.63 15.6% 14.7% 21.9% 19.9% 39.4% 34.9%
Invesco S&P 500 Equal Weight Income Advantage ETF 0.50 12.9% 6.9% 20.3% 9.6% 35.5% 12.4%
Source: FactSet
All three funds have one-year beta below that of the S&P 500, but you can see how the volatility risk is lower for the equal-weighted approach and even lower for RSPA.
The returns are net of expenses, which for RSPA total 0.29% of assets. That means annual fees of $29 for a $10,000 investment.
As you would expect, since some upside is given up in return for the high monthly income, RSPA has had lower price increases and lower total returns than the other two ETFs. But consider that, for one year, that 6.9% price increase has come on top of a tailing distribution rate of 8.82%, which is based on the current price. And the current distribution rate is even higher, at 9.17%.
Those are very attractive yields when compared with those of most bond funds. And RSPA has still allowed investors to participate in a good amount of the broad stock market's price gains.
For its two-year life, RSPA has managed to maintain a distribution rate of roughly 9%. Burrello said he would expect the fund to be able to keep its distribution level this high "as long as volatility is at a reasonable level."
MW How to earn a 9% dividend yield while cutting your risk in the stock market
By Philip van Doorn
Your own evolving goals might point the way to a different type of exchange-traded fund
You can receive an attractive monthly income stream while lowering your risk with exchange-traded funds that use covered-call strategies.
A stock market that is rapidly climbing a wall of worry could give some people reason to pause and consider ways to protect their investments.
The S&P 500's sprint to its first record close in two months this week came despite worries about inflation and rising interest rates, volatile oil prices as the Middle East conflict continues, and concerns about financing artificial-intelligence buildout. But there is also good reason to stay invested, as earnings have exceeded expectations by enough to provide fundamental support for the market's rally.
The trick in the current environment is to address your own evolving goals as an investor. You might ask: How do I lower risk and generate a lot of income in a way that allows me to continue to participate in the stock market's growth over the long term?
Let's tackle that question.
Reducing stock-market risk while possibly riding a paradigm shift
So far this year, the S&P 500 SPX has returned 13.6%, including reinvested dividends, which is good performance when you consider that over the past 20 years through Wednesday the index has averaged an annual return of 11.5%, according to FactSet.
The S&P 500 is weighted by companies' market capitalizations, which means the index is nearly 40% concentrated in its largest 10 components. This is close to its highest level of concentration to the top 10 according to data compiled by Ned Davis Research going back to 1972.
The portfolio of the State Street SPDR S&P 500 ETF Trust SPY, which tracks the S&P 500 by holding all of its stocks, is 20% concentrated in three names: Nvidia (NVDA), Apple (AAPL) and Microsoft (MSFT). This isn't to say that there is anything wrong with weighting an index or portfolio by market cap. The methodology rewards success.
But so far this year the S&P 500 Equal Weight Index XX:SP500EW has outperformed the S&P 500 with a total return of 15.8%.
One reason for the recent outperformance of the equal-weighted index has been that the stocks of some of the largest tech companies have been volatile as investors have reacted sharply to management teams' guidance. For example, shares of Meta Platforms (META) fell 8% on July 30 after the company reported a 28% increase in revenue, but investors questioned whether CEO Mark Zuckerberg's plan for increasing AI capital spending can eventually boost the bottom line.
Rising long-term interest rates may also threaten stock prices. "Bond yields have risen and [companies'] forward earnings yields have declined, indicating that equities have gotten more expensive," Tim Hayes, NDR's chief global strategist wrote in a note to clients last week.
Warning: The S&P 500 just hit a new high. 'Big Short' investor Michael Burry thinks it could bring a 1987-style fall.
"The top-heavy Big Tech segment of the market is getting choppy," according to John Burrello, a senior portfolio manager for global strategies at Invesco. But he takes a more positive view when considering the likelihood that performance within the S&P 500 will continue to broaden out.
"Maybe the next AI trade is the S&P 500 companies that are not AI stocks" because these companies "have the money to buy the tokens from AI companies" that can help them improve efficiency and profitability, Burrello told MarketWatch. Tokens are the units of data and computing power that customers using Anthropic's Claude AI platform purchase, for example. "If you are a small firm, you will run out of tokens quickly," he said.
For five years through Wednesday, the cap-weighted S&P 500 returned 87%, while the S&P 500 Equal Weight index returned 56.5%. But if we look back for 25 calendar years through 2025, the equal-weighted index has outperformed the cap-weighted index during 13 of those years, with the indexes tied during one year, 2006, according to data provided by FactSet.
The S&P 500 Equal Weight Index is tracked by the Invesco S&P 500 Equal Weight ETF RSP, which was established in 2003 and has grown to $99 billion in assets under management. There are other equal-weighted funds, but they are based on other indexes, some broader than the S&P 500. So Invesco's RSP is pretty much your only way to follow an equal-weighted S&P approach with an ETF. Invesco also offers equal-weighted ETFs that track each of the S&P 500's 11 sectors.
Generating high income while lowering risk even further
The Invesco S&P 500 Equal Weight Income Advantage ETF RSPA uses a covered-call strategy to generate option premium income that is distributed to shareholders monthly. The fund holds a passively managed portfolio of stocks that tracks the S&P 500 Equal Weight Index and ladders one-month equity-linked notes daily as an overlay on the portfolio to add the options-based income.
The covered-call strategy is essentially one that gives up some of the upside of the underlying index, in return for generating income by writing covered-call options. Option premiums tend to increase as the stock market's price volatility rises and vice versa.
So if you would like to boost your investment income, this strategy is worth considering for a portion of your portfolio. There are many ways to approach covered-call income strategies. This one is rather conservative, since it is based on an equal-weighted S&P 500 portfolio.
RSPA's current distribution rate, based on the most recent monthly payout and Wednesday's closing price, is 9.17%. Its 12-month distribution rate, based on monthly payouts over the past year, is 8.82%.
A call option is a contract that allows an investor to buy a security at a particular price (called the strike price) until the option expires. A covered call option is one that you write, or sell, when you already own a security.
For example, let's say you own 100 shares of a company and the current share price is $100. You would be willing to sell the stock if it were to rise to $110. You can sell an option to another investor allowing them to buy the stock for $110 (the strike price) until the option expires. You will receive a premium for selling the option.
If the stock rises above $110 before the option expires, you will be forced to sell it for $110 no matter how high the share price has risen. If the stock doesn't rise to $110 before the option expires, you keep your premium and can write another option.
So you are giving up some upside potential in return for the income. For a much more detailed explanation of how covered-call strategies work and how fund managers use them, you can read this profile of three ETFs.
The RSPA fund has about $1 billion in assets under management. It was established in 2024. So we only have a two-year performance record, but those two years have illustrated what investors can expect from this type of strategy during a bull market. Its daily laddering strategy for essentially writing a covered-call on a small portion of the portfolio using one-month equity-linked notes is meant to help the fund capture more upside after a broad stock-market decline than it could capture if it were to take a less active trading approach.
This table shows the three ETFs. It includes one-year beta, which is a measure of volatility when compared with that of the S&P 500. So a beta of 1 would mean precisely the same price volatility of the index. The table also includes price changes and total returns with dividends reinvested. The total returns are useful for comparison, but if you are pursuing the covered-call strategy for income then you won't be reinvesting.
ETF Beta YTD total return YTD price change 1-year total return 1-year price change 2-year total return 2-year price change
State Street SPDR S&P 500 ETF 0.97 13.5% 12.9% 23.9% 22.6% 52.3% 48.8%
Invesco S&P 500 Equal Weight ETF 0.63 15.6% 14.7% 21.9% 19.9% 39.4% 34.9%
Invesco S&P 500 Equal Weight Income Advantage ETF 0.50 12.9% 6.9% 20.3% 9.6% 35.5% 12.4%
Source: FactSet
All three funds have one-year beta below that of the S&P 500, but you can see how the volatility risk is lower for the equal-weighted approach and even lower for RSPA.
The returns are net of expenses, which for RSPA total 0.29% of assets. That means annual fees of $29 for a $10,000 investment.
As you would expect, since some upside is given up in return for the high monthly income, RSPA has had lower price increases and lower total returns than the other two ETFs. But consider that, for one year, that 6.9% price increase has come on top of a tailing distribution rate of 8.82%, which is based on the current price. And the current distribution rate is even higher, at 9.17%.
Those are very attractive yields when compared with those of most bond funds. And RSPA has still allowed investors to participate in a good amount of the broad stock market's price gains.
For its two-year life, RSPA has managed to maintain a distribution rate of roughly 9%. Burrello said he would expect the fund to be able to keep its distribution level this high "as long as volatility is at a reasonable level."
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