A Tail-Risk Selling Income ETF Portfolio: High Yield, Rare but Brutal Drawdowns

Tail risk is one of those concepts that sounds academic until you live through it. In simple terms, it’s the kind of low-probability, high-impact event that makes you say, “oh crap,” whether for better or worse. These are not everyday market fluctuations. They are shocks that sit at the far ends of the probability curve and reprice assets violently and without warning.

Even with the benefit of hindsight, just twelve days into 2026 has already delivered a few textbook examples. Threats of a criminal indictment against Federal Reserve Chair Jerome Powell by President Donald Trump, the toppling of Venezuela’s regime by U.S. special operations forces and the capture of President Nicolás Maduro, and rhetoric around annexing Greenland all qualify as tail-risk events.

Some assets benefited immediately. Gold and silver caught bids. Others sold off just as fast. Energy equities, currencies, and rates all reacted in different and sometimes counterintuitive ways.

No one knows what the next tail risk will be. Maybe it’s another North American geopolitical shock, a trade rupture, a sudden policy reversal, or something far stranger that nobody is modeling today. At this point, almost anything feels possible.

But enough fretting. The real question most investors eventually ask is whether tail risk can be turned into profit. The answer is yes, and broadly speaking, there are two ways to approach it.

The first is to hedge tail risk by buying insurance. You accept negative carry, paying small, recurring costs in exchange for the hope of a large, convex payoff during a crash. VIX futures ETFs and inverse ETFs fall into this camp. They can work, but only if the disaster arrives before the bleed becomes intolerable.

The second approach is to sell tail risk. In this case, you collect steady, often generous premiums by taking the other side of fear. You get paid month after month, sometimes handsomely, until the day the tail event actually materializes. When it does, the losses are fast, deep, and impossible to ignore.

This article focuses on that second path: selling tail risk for income. If the goal is yield, and you want to avoid the latest return-of-capital derivative onion ETFs, this is how I would approach it using a small set of alternative ETFs designed to pay you well… right up until the moment they don’t. There is no free lunch here, only different ways of choosing how and when you realize risk.

33% in Autocallable ETFs

The first third of this tail-risk-selling income portfolio is allocated to the Calamos Autocallable Income ETF (CAIE). This is one of the more interesting income ETFs on the market because it gives retail investors access to structured products that have traditionally been reserved for family offices, institutions, and advisors working with high-net-worth clients.

At a high level, an autocallable is a structured note that pays a high coupon as long as the underlying index stays within a predefined range. If the index trades above a certain level on an observation date, the note is “called” early and the investor gets their principal back plus accrued coupons. If the index falls too far and breaches a downside barrier, principal protection can be impaired.

CAIE does not hold individual autocallable notes directly. These instruments are relatively illiquid. Instead, the fund uses total return swaps to gain exposure to the MerQube U.S. Large Cap Volatility Advantage Autocall Total Return Index. In practical terms, this index represents a ladder of more than 52 auto-callable notes with staggered maturities.

As of now, the index has a weighted average coupon of roughly 14.2%, with 100% of its currently live autocallables still paying coupons. Importantly, there are no notes near maturity with principal at risk. Calamos provides transparency into which notes are above their barriers, which have been called early, and which have fallen below their thresholds. At the moment, none have breached their downside barriers, which matters a lot when thinking about tail risk exposure.

Owning autocallables is essentially a bet on range-bound markets. You are selling both downside volatility and upside volatility. If markets drift sideways, you collect fat coupons. If markets rally too hard, your upside is capped when notes are called away early. If markets crash hard enough to break the downside barriers, principal losses can materialize.

CAIE currently offers monthly distributions with an annualized distribution rate around 14.4% after accounting for its 0.74% expense ratio. Liquidity is not stellar, with a 30-day median bid-ask spread near 0.15%, but that is fairly typical for an ETF holding exotic exposures.

33% in Short Volatility

If you are going to sell volatility, it pays to do it carefully. Many short VIX futures products simply roll the front-month contract and offer little in the way of risk management. They also tend to generate returns primarily through price appreciation rather than income, and often come with K-1 tax forms.

For investors who actually want yield from short volatility exposure, the Simplify Volatility Premium ETF (SVOL) stands out. Its structure is more thoughtful than most short-volatility products. The core of the fund is a collection of other Simplify ETFs that hold a mix of fixed income and alternative strategies. This base is designed to provide some NAV stability and a foundation for regular distributions.

The income engine comes from a short position in VIX futures. At present, SVOL is short the February 2026 VIX future at roughly a quarter of the portfolio. This position benefits from two structural features of volatility markets. First is contango, where longer-dated VIX futures tend to trade above spot volatility and gradually decay as they roll toward expiration. Second is mean reversion, since volatility tends to spike briefly and then fall back toward its long-term average.

Of course, history has shown what happens when volatility spikes violently. Episodes like 2018’s “Volmageddon” are reminders that short volatility can be devastating without protection. To address this, SVOL layers in out-of-the-money VIX call options. Currently, these include calls at strikes such as 60, 70, and 80 across January and February 2026 expiries. These hedges are not designed to eliminate losses, but they are intended to prevent catastrophic blowups during extreme volatility events.

After its 0.66% expense ratio, SVOL is currently distributing at an annualized rate north of 20%, paid monthly. That yield is real, but so is the risk. This is a classic example of selling tail risk. Most of the time, it works. Occasionally, it doesn’t. Pick your poison.

30% in CCC-Rated High Yield Bonds

The final sleeve of the portfolio focuses on credit risk. Imagine lending money to a deadbeat cousin you don’t fully trust. If default risk is high, you demand a much higher interest rate. In public markets, that dynamic shows up most clearly in deeply speculative corporate bonds below the BBB level.

The BondBloxx CCC Rated USD High Yield Corporate Bond ETF (XCCC) provides exposure to this segment of the market. It passively tracks an index of U.S. dollar-denominated corporate bonds rated CCC1 through CCC3, based on an average of ratings from Moody’s, S&P Global, and Fitch. To prevent extreme concentration, individual issuers are capped at 2% of the portfolio.

Right now, XCCC is paying a 30-day SEC yield of about 11.3%. That yield exists for a reason. According to S&P Global’s historical data, CCC-rated bonds have exhibited a three-year cumulative default rate of roughly 46%. Compare that to less than 1% for the lowest tier of investment-grade bonds.

Investors get paid well for taking this risk until a credit or liquidity crisis hits. When that happens, prices can collapse quickly, and drawdowns of 40% to 50% are not out of the question. This is not a defensive bond allocation. It is another form of selling tail risk, this time in credit markets.

Putting It All Together

This portfolio is intentionally simple: roughly one-third in CAIE, one-third in SVOL, and one-third in XCCC. The common thread across all three is the same. You are selling insurance to the market and collecting premiums in the form of high monthly income.

From a tax perspective, this portfolio is best suited for tax-sheltered accounts like a Roth IRA. CAIE and SVOL tend to distribute a large portion of return of capital, which reduces cost basis rather than triggering immediate taxes. XCCC, on the other hand, distributes ordinary interest income that is fully taxable at the federal and state level.

The key takeaway is not to be dazzled by the headline yields. These ETFs are doing exactly what they are designed to do. They generate income by absorbing risks that most investors prefer to avoid. That trade-off can work very well for long stretches of time. But when the music stops, losses are fast and severe.

Long story short: if you choose to sell tail risk, do it with open eyes, position sizing discipline, and a clear plan for taking profits before the inevitable “oh crap” moment arrives.