Defiance S&P 500 Income Target ETF

SPYT

Market cap $136M

Defiance S&P 500 Target Income ETF is rated Hold due to its capped upside and underperformance versus peers. SPYT's ATM daily credit call spread strategy generates high income but limits capital appreciation, making it suitable only for income-focused investors. SPYT's 20% targeted yield is attractive, but payout sustainability is questionable in prolonged S&P 500 downturns.

Today we'll compare the Defiance S&P 500 Income Target ETF (SPYT) and Roundhill S&P 500 Target 20 Managed Distribution ETF (XPAY), which both target a 20% annualized yield. SPYT uses a covered call spread strategy, capping upside and leading to NAV erosion, resulting in a Hold rating. XPAY buys deep in-the-money options, closely tracking S&P 500 returns and offering stable distributions, earning a Buy rating.

SPYT promises a 20% annual income using daily S&P 500 call spreads, but this strategy is fundamentally flawed and risky. Daily options trading creates a poor risk-reward, especially in volatile bull markets. SPYT and similar funds have underperformed the S&P 500.

SPYT targets a 20% annual yield using an options overlay on the S&P 500, appealing to income-focused investors seeking predictable monthly payouts. The fund's strategy sacrifices some upside participation in exchange for high income, primarily through selling at-the-money 0DTE call spreads. Distributions rely heavily on the return of capital, causing net asset value erosion and declining yields for long-term holders.

SPYT, with a target distribution rate above 20%, boosts the income component of this ETF category compared to more well-known ones like XYLD. I don't really like its fluctuation relative to NAV; it's a point worth reconsidering, given the high dividends and the past 100% ROC. To be considered in sideways and bull markets, and it's not a better hedge than the underlying during bearish phases.

High-yield investments like BDCs, MLPs, CEFs, and REITs offer substantial dividend yields, often overlooked by retail investors due to a lack of awareness. Option ETFs generate high income by writing options against equities, with some offering extreme yields, like Yieldmax MSTR Option Income Strategy ETF at 113%. These funds are for income generation, not total return or capital appreciation, and require a different evaluation lens than traditional investments.

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SPYT is an ETF that mimics the S&P 500's daily price while generating income through ATM options. The fund aims to provide a 20% annual dividend yield. The fund's ATM option strategy caps upside potential, leading to underperformance in bull markets compared to traditional ETFs like IVV. SPYT's short history and reliance on return of capital for distributions make its long-term resilience and NAV growth uncertain.

The Defiance S&P 500 Target Income ETF (SPYT) offers monthly income and downside protection but caps upside potential, making it ill-suited to bullish markets. The ETF's strategy involves selling call spreads on the S&P 500, aiming for a 20% annualized payout, but it heavily relies on return of capital. Despite achieving its income target, SPYT's market price has significantly lagged behind its underlying asset, IVV, due to its options strategy and resulting high return of capital.

SPYT and XDTE ETFs both write 0DTE calls on the S&P 500, but SPYT uses call spreads, while XDTE uses slightly OTM calls. XDTE has outperformed SPYT since March 2024, delivering superior total returns and higher distribution yields. This suggests XDTE has a superior strategy. However, due to extended market valuations, I remain cautious on both ETFs and rate SPYT a hold.