On this episode of the ETF of the Week podcast, VettaFi’s Head of Research Todd Rosenbluth discussed the Technology Select Sector SPDR Premium Income Fund (XLKI) with Chuck Jaffe of Money Life. The pair discussed several topics related to the fund to give investors a deeper understanding of the ETF overall.

Chuck Jaffe: One fund, on point for today, the expert to talk about it. This is the ETF of the Week. Welcome to the ETF of the Week, where we examine new, newsworthy, trending, unique, and intriguing exchange-traded funds with Todd Rosenbluth, the head of research at VettaFi. And if you go to their website at VettaFi.com, you will find all the tools and research you need to make yourself a savvier and smarter investor in exchange-traded funds. Todd Rosenbluth, great to chat with you again.

Todd Rosenbluth: Great to be back.

Chuck Jaffe: Your ETF of the Week is…

Todd Rosenbluth: The Technology Select Sector SPDR Premium Income Fund, XLKI.

Chuck Jaffe: XLKI, the Technology Select Sector SPDR Premium Income Fund. Ooh, Todd, I’ve got a lot of questions, because this is a brand new fund that is part of an entire portfolio, or suite, of brand new funds that are using options to deliver income on basically Select Sector SPDR ETFs. So, explain how these work and why you’re making this one the ETF of the week now.

Todd Rosenbluth: Well, you just made my job easier! You just had to partially explain what this is. So, this is going to own XLK, which is technology stocks in the S&P 500 — so, Apple, Nvidia, and Microsoft, among the other stocks that you’d find in a market-cap-weighted approach. We can come back to whether or not that’s the right way to get exposure in this market. And then it’s going to use options to generate income.

So, whereas the Technology Select Sector SPDR is yielding roughly 1% — in fact, the overall S&P 500 is yielding just over 1% — we expect that XLKI is going to offer a well-above-average income, a 7–8% yield, we think. We’ll see. This fund is brand new. It only has $1 million as you and I are talking about it. So it’s still likely to build an audience. We believe there’s a need for income; we think there’s an interest in income. We’ve talked about options-based strategies beforehand. This is the technology way of getting exposure to that.

Chuck Jaffe: Like I said, it’s part of a suite. So you picked technology, but you could have picked consumer discretionary, which would have been XLYI, or energy, you could have picked XLEI, or healthcare, XLVI, and so on and so forth. So, is there a reason why you particularly like the [technology]play right now?

Todd Rosenbluth: I particularly like the technology play in XLKI in this conversation. And the reason I do is everybody seems to like technology. We saw Nvidia continue to climb higher. It’s now 8% of the S&P 500. Microsoft continues to climb higher. We’re seeing strong, renewed interest in growth stocks and technology stocks. What this ETF will likely do is provide some downside protection through the use of options. It will not climb as high as XLK, the Technology Sector SPDR, because using options is going to limit some of that upside, but also generate additional income.

So we think the Fed is likely to be cutting interest rates later on this year. People are continually searching for income opportunities. This is a way of getting tech exposure and income. And I just want to note — maybe you were going to get there — we’ve talked, I believe, about Nasdaq-based options strategies. The Nasdaq is not all technology. The Nasdaq is mostly technology, but it’s also consumer discretionary. There are some healthcare stocks within it. If you want tech and income, XLKI is the way to go.

Chuck Jaffe: Everyone loves income. Like, income is not something that investors fight against. So, we should point out there is some measure of a price you pay for the income in that if the underlying ETF is booming — if technology is on a rocket toward record highs — you will not expect to beat that with this kind of a fund, right?

Todd Rosenbluth: Correct. So this fund is less likely — it’s possible, but less likely — to outperform its original fund, XLK, in a bullish, straight-up market. If there’s volatility? Volatility is a good thing when you’re using an options-based strategy to generate additional income. So that could help if technology is flat or down slightly. But if you still want to have exposure to it, then this is a way to go. And to just get in front of potentially another question, because I know you had a list of questions, so let me see if I can tick off some of them in advance.

You own technology stocks in a broader S&P 500 portfolio. It’s the largest sector. It’s if you want to overweight exposure to technology and you want to have income conjoined with that, then this is a good way of going. But you own S&P 500 technology stocks through your S&P 500-based ETF like SPY or SPLG.

Chuck Jaffe: And I would imagine if what you were looking for was income from everything, that rather than pick a sector or two, you would just go back and as you said, you know, do the SPYI, which has been the ETF of the Week, or do something along those lines that gives you income off of everything and basically puts the options overlay on the whole market.

Todd Rosenbluth: That’s right. So this is targeting the exposure to the technology sector in the case of XLKI. You referred to some of the other sibling products that came to market. If you wanted to have income with healthcare and an overweight, or income with consumer discretionary, then yes, there’s a number of products that offer broad market exposure, and they’ve been increasingly popular. We’ve seen covered call, or premium income-based, ETFs gain in popularity this year. We’re hearing from a lot of advisors and investors that are interested in them. We want to give a range of different strategies to consider.

Chuck Jaffe: We are seeing — and you and I have discussed — a lot of covered-call ETFs being created. And it’s the new addition. And as you pointed out, these are brand new. This fund, as we record it, has virtually no money in it. But you’re not worried that this fund is going to get there in part because of the sponsor.

As we see new covered-call ETFs, do they have a new-fund phenomenon where they work particularly well when they’re small, or do they struggle because with an options strategy you want to have more liquidity? Is there any reason why with funds of this ilk, even if it’s not XLKI, that you want to see some critical mass before you’re willing to commit to a new fund?

Todd Rosenbluth: I don’t think so. I mean, State Street has launched a suite of 11 of these products. I feel they’re committed to having these products have a chance to be successful. The holdings are quite simple. This, being XLKI, owns XLK and then owns options. It’s that simple. So, we think this can gain scale.

I would note that this is a more expensive version than getting exposure to XLK; this is 35 basis points. So you are paying for that options overlay, that premium income, as part of the portfolio. You’re hopefully going to get rewarded many times over in the form of income from an above-average dividend yield. But I don’t think it’s too early to take a closer look at this. Obviously, we’re early. $1 million means almost nobody has invested in this, and by the time we’re recording it, hopefully by the time people are listening to it, it’s a little bit larger.

Chuck Jaffe: Yeah. Well, again, that’s only a day or two between recording and when people will hear it. There is the interesting side here. Where you just talked about the expense ratio. Of course, the higher expense ratio is what you’re paying to get the options exposure. That structure is basically passive investments in the index, but active when you add the options overlay because options have to be somewhat active, right?

Todd Rosenbluth: That’s correct. So you’re getting the benefits of both active and passive together. And that’s how we’re seeing many, but not all, of the covered-call ETFs, in that the active management is the options overlay to generate that income. But the technology sector within the S&P 500 is relatively well understood. You get exposure to Nvidia, Microsoft, Apple, Broadcom, Oracle — I’m naming some of the technology stocks off the top of my head — through this ETF in a passive manner. You just get the benefits of an options overlay.

Chuck Jaffe: Last question here, and it actually comes from one of my listeners on Money Life, Tristan in Bellevue, Washington, who says he’s very intrigued by the new crop of covered-call ETFs. And he wrote this before State Street came out with this new crop that we’re talking about. [Tristan] says everybody seems to be living off of all of the covered-call income, etc. He wants an expert’s view because he says they seem too good to be true.

But maybe if you understand more about it… well, you do understand more about it. So, on these options strategies, when a consumer is out there hearing something that makes them think, “Is this too good to be true?” Well, you just picked this as the ETF of the Week. So, look him in the eye and tell him, “Is this too good to be true?” How do you make sure that what we’re hearing about options strategies is not too good to be true, and what would be your worry in owning one of these about what could go wrong?

Todd Rosenbluth: So I’m looking straight ahead and saying I feel good about these strategies and what they’re aiming to deliver. I think in that note, because you shared it with me in advance, tied to the topic, some of the ETFs listed in there were ones we talked about from NEOS, I believe… There is a track record that just shows the monthly distributions that are paid out for that ETF.

If people want to make sure that they’re getting that with XLKI, then they may want to wait a month or two to see what that yield is going to be. And yes, we’re guessing what we think that yield is going to be. People may want to wait until we get to the end of the month, one month forward, so they can see what that income distribution is going to be. The proof is in the pudding. These covered-call strategies collectively have delivered the income as expected. You get an experience that’s different from the broader market because of the options overlay, but it’s still a good experience.

Chuck Jaffe: It’s the XLKI, the Technology Select Sector SPDR Premium Income Fund, part of a whole new family of ETFs and the ETF of the Week, right out of the box from Todd Rosenbluth, head of research at VettaFi. Todd, great stuff. Thanks so much, as always, for joining me.

Todd Rosenbluth: It’s always my pleasure.

Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe. I’m Chuck Jaffe, and I’d love it if you check out my hour-long weekday show. Go to your favorite podcast app or check it out online at MoneyLifeShow.com.

If you want to check out your favorite, or maybe soon-to-be-favorite, ETFs online, go to VettaFi.com. They’ve got a full suite of tools that’s going to help you check them out and make yourself a better investor. They’re on X at @Vetta_Fi. Todd Rosenbluth, their head of research, my guest on the ETF of the Week, he’s on X as well at @ToddRosenbluth.

The ETF of the Week is here for you every Thursday. Make sure you don’t miss an episode by following along on your favorite podcast app. And if you like us, leave us a review or give us a rating because those things really do help. We’ll be back next week with another ETF for you to consider. And until then, happy investing, everybody!

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