Investing in exchange-traded funds (ETFs) is one of the easiest ways to start generating passive income. You don't have to manage a portfolio of stocks. Instead, you can buy a few diversified funds and just sit back and watch the income passively flow into your portfolio.
There are lots of dividend ETFs to choose from. Here are two funds that could supply you with a supercharged stream of passive income.
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A super high yield
The Global X SuperDividend ETF (NYSEMKT: SDIV) has a very straightforward strategy: It invests in 100 of the highest-yielding dividend stocks in the world. On one hand, high-yield dividend stocks are at a higher risk of reducing their dividends. These companies can be slower growers and have weaker financial profiles.
On the other hand, this fund's global strategy can help decrease risk by increasing diversification while reducing exposure to interest rate sensitivity in a single country. It has a solid record of paying dividends, delivering monthly distributions for 13 years in a row, though the payment has fluctuated, sometimes significantly, from year to year:
SDIV Dividend data by YCharts
Still, if you're seeking a big-time income stream, this fund can certainly deliver. Over the past 12 months, its dividend yield is 10.8%. For comparison, the S&P 500's dividend yield is 1.2% these days. Put another way, every $1,000 invested into this fund could generate over $100 of passive income each year. That compares with just over $10 for an S&P 500 index fund.
An enhanced income stream
The Fidelity Yield Enhanced Equity ETF (NYSEMKT: FYEE) has a simple objective. The fund "seeks current income while maintaining prospects for capital appreciation." It does that by investing about 80% of its assets in companies that are large enough to be members of a major index such as the S&P 500 or Russel 1000. It selects the stocks it holds using a computer-aided, quantitative analysis to identify and select a broadly diverse group of companies, both U.S. and international, that should deliver a higher total return than the S&P 500. It considers things such as their historical valuations, growth prospects, profitability, and other factors.
The equity portfolio helps the fund achieve its goal of providing the potential for capital appreciation. The fund currently has 161 stock holdings, led by notable names Apple, Nvidia, and Microsoft, accounting for 7.5%, 6.2%, and 5.7% of its net assets, respectively.
The second aspect of its strategy is to provide current income for investors. It does that through two distinct methods. First, the ETF will sell or write call options on a major market index like the S&P 500. By selling, or shorting, the option, the fund gets paid the entire premium, or the value of the option, up front. The fund gets to keep the whole premium if the option expires worthless, or it can roll the option forward at expiration to generate additional income.
On top of that options strategy, the fund will lend securities it owns to short-sellers to earn additional income. Short-sellers need to borrow a security before they can sell it short. They pay the lender a fee to borrow the security. When they close their trade, they return the security to the lender.
Here's where things get interesting. The fund has made three quarterly dividend payments since its launch, dishing out $0.45, $0.50, and $0.51 per share. If we annualize that average, the fund has a 7% yield. At that rate, it could turn a $1,000 investment into $70 of annual passive income.
Higher-risk, high-yielding ETFs
Global X SuperDividend ETF and Fidelity Yield Enhanced Equity ETF can provide investors with supercharged passive income streams. However, they're best suited for those with a high-risk tolerance because these funds employ riskier investment strategies. Still, they could be a good way to boost your passive income as part of a diversified ETF investment strategy.
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Matt DiLallo has positions in Apple and has the following options: short February 2025 $275 calls on Apple. The Motley Fool has positions in and recommends Apple, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
