5 High-Yield Alternative ETFs Income Investors Should Know About

If you spend any time browsing ETF launches, you will notice a steady stream of products promising eye-catching yields. Many of them rely on synthetic, derivative-heavy strategies tied to a single stock or a small group of high-beta names.

The marketing is familiar: double-digit distributions, sometimes even triple-digit yields, framed as a solution for income-starved investors. What tends to be missing from the conversation is what happens to the fund’s net asset value (NAV) over time.

Look closely at the charts and the pattern is hard to ignore. In many cases, the ETF’s price steadily declines even as distributions continue to flow. A major reason is return of capital, which inflates headline yields by effectively handing investors back their own money.

When you compare these products against their underlying stocks on a total return basis (which is the only comparison that really matters) the results are often disappointing.

Now, none of this is likely to dissuade investors who are determined to chase yield. In my opinion, even closed-end funds (CEFs) with high fees, internal leverage, and persistent discounts to net asset value may actually be the lesser evil. At least those structures are transparent about what they are doing.

The ETF universe, however, has evolved. A number of issuers now use complexity more thoughtfully, applying it to generate income in ways that are less reliant on financial engineering gimmicks. These funds are not cheap, and on a total return basis they are unlikely to outperform broad equity indexes over multiple market cycles. That said, I recognize that some investors will prioritize income regardless.

If that describes you, the ETFs in this list are worth knowing about. When I say “alternative,” I mean strategies that go well beyond traditional stocks, bonds, or vanilla options overlays. This is not a list of dividend staples, nor does it include the popular JPMorgan income ETFs built around equity-linked notes. Instead, these are more specialized approaches using unconventional assets and structures.

They are not simple, and they are not for everyone. But for income-focused investors willing to accept complexity in exchange for cash flow, I think these five ETFs represent a more responsible way to pursue yield than many of the inflated distribution products currently grabbing attention.

Autocallables

The ETF structure can own structured products, which are pre-packaged investments built with derivatives and rules-based payoff profiles. One of the newest examples to reach the ETF market is autocallables, which until recently were mostly the domain of private banks and institutional portfolios.

Autocallables are notes linked to an equity index or basket. They pay a high coupon as long as the underlying stays above a predefined barrier. If certain conditions are met on scheduled observation dates, the note is “called” early and returned to investors at par. If markets fall sharply and breach the barrier, however, downside risk can emerge quickly.

Retail investors can now access this space through Calamos Autocallable Income ETF (CAIE). The ETF holds a ladder of more than 52 autocallables, spreading risk across vintages. Structurally, the fund uses box spreads and total return swaps to capture the performance of the underlying autocallable index.

The result is a very high income stream, currently reflected in a 14.32% distribution rate paid monthly. Despite a 0.74% expense ratio, institutional interest has been strong because this is one of the first ways to access autocallables in a diversified, liquid ETF wrapper.

Mortgage REITs

Most investors think of REITs as landlords that own apartments, offices, or warehouses. Mortgage REITs are different. They do not own property at all. Instead, they invest in mortgage-backed securities.

Mortgage REITs typically borrow short-term and invest longer-term, using leverage to amplify income. This structure can generate very high yields when rates are stable, but it also introduces meaningful interest-rate and liquidity risk.

A clean ETF example is VanEck Mortgage REIT Income ETF (MORT). After a 0.42% expense ratio, the fund currently delivers a 12.6% 30-day SEC yield. The risk shows up during rate shocks and market stress. In 2022, rapidly rising rates compressed margins, and during periods like the March 2020 COVID selloff, drawdowns were severe.

Mortgage REIT ETFs can work in stable or falling-rate environments, but investors need to be comfortable with volatility and sharp capital swings.

Business Development Companies (BDCs)

There has been a growing push to squeeze private credit into ETFs, often bumping up against the 15% illiquid asset limit. Personally, I prefer a more established and transparent alternative in BDCs.

BDCs are publicly traded vehicles that lend directly to middle-market companies, often through floating-rate senior loans. This makes them one of the most liquid ways to access private credit-style income. The challenge is that evaluating individual BDCs is hard.

This is one area where active management can add value. The Putnam BDC Income ETF (PBDC) takes a selective approach based on fundamentals rather than simply weighting BDCs by market cap. The fund currently offers a 10.01% 30-day SEC yield.

The headline expense ratio of 13.49% looks high at first glance, but much of it reflects acquired fund fees embedded in the underlying BDCs themselves. In practice, this is a standard feature of the asset class rather than a unique penalty of the ETF.

Short VIX Futures

Many investors remember short volatility products from the 2018 “Volmageddon” episode, when poorly designed strategies collapsed. Since then, (most) issuers have learned painful lessons, and newer approaches are far more risk aware.

A notable example is Simplify Volatility Premium ETF (SVOL). The fund seeks income by targeting roughly 0.2x to 0.3x inverse exposure to VIX futures. What makes SVOL different is its structure.

The core portfolio holds Simplify equity and fixed income ETFs to help stabilize net asset value. On top of that sits the short VIX futures overlay. Crucially, SVOL also owns out-of-the-money VIX call options to partially hedge against volatility spikes.

After a 0.66% expense ratio, the ETF currently shows a 20.31% distribution rate. This is an income-first strategy with real tail risk, but I think it is far more thoughtfully constructed than earlier short-volatility products that blew up.

Collateralized Loan Obligations (CLOs)

CLOs are often confused with the mortgage-backed CDOs popularized in The Big Short. They are not the same. CLOs are backed by pools of senior secured corporate loans, not subprime mortgages.

A CLO is created by pooling floating-rate loans and slicing them into tranches. Higher-rated tranches receive priority on cash flows and lower yields. Lower-rated tranches take more risk but earn higher income. As you move down the stack, volatility increases.

In ETF form, investors cannot currently access equity tranches, but they can reach into the BBB to single-B portion of the capital structure. A notable example is Elridge BBB-B CLO ETF (CLOZ). After a 0.50% expense ratio, the fund offers a 7.31% 30-day SEC yield.

Because the underlying loans are floating rate, CLOZ is relatively resilient to rising interest rates. However, during credit stress events, drawdowns can still be meaningful. It is not a free lunch, but as structured credit ETFs go, it is among the more disciplined implementations.