ETF Edge - Keeping income incoming 2/18/26

Episode Date: February 18, 2026

For a large swath of ETF investors, consistent income is more important than the next big thing. But how do you best go about that when the big things cause big swings in the market?        Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ. Let's rethink possibility. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange traded funds, you're in the right place. Every week we're bringing you compelling interviews, thoughtful market analysis, and breaking down what it all means for investors.

I'm your host, Dominic Chu. Now, for a large swath of ETF investors, consistent income generation is king. So what tools are best built to have maybe that big moat to keep out some of that market uncertainty and still provide income? Here's my conversation with Christian Magoon, CEO at Amplify ETFs, and Nick Ryder, the chief investment officer at Kathmir Capital. Well, gentlemen, thank you both for being here with us right now. Maybe I'll start with you, Nick, on this one here first. We talk about the recent market volatility and just how it has affected certain investors.

psychology's, if you will, about the sentiment, the things that they're feeling. Have you noticed any difference among your client base at Kathmir with regard to just what kinds of questions you're getting from your investors and clients about the current market environment? We really haven't at this juncture. I'd say for many of our clients, we've taken the time up front to truly understand what makes them tick, their goals, their objectives, their tolerance for risk. And at this juncture, I think many of our clients feel comfortable with where their investment plan is. We've spent a lot of time really kind of starting late portion of last year into year on planning meetings really making

sure we're reassessing risk tolerance making sure our investment programs for our clients are actually tailored to their needs that they're aligned with their tolerances for risk understanding that downside volatility happens in equity markets routinely we had been obviously on a fantastic stretch and really setting up the stage for saying hey valuation we've gotten stretch we've had a fantastic three-year run here let's not forget that downside volatility certainly happens and are we in the right place for it. And so assessing liquidity needs, spending needs from the portfolio, and really doing kind of that safety check to make sure where we're needed to be. And so I think right now, again, equity markets flat for the year, let's call it in the U.S. large cap space, value stocks having a

fantastic run year-to-date, small caps kind of catching up some in foreign markets where we've been big allocators on the equity side too, having still a tremendous run. So all in all, I think clients really feeling, I think, good at this structure. We have not seen really an uptick in the change of tone of questions or anything at this. structure. Christian, what about you? I mean, the recent market volatility, Nick brings up an excellent point, and that's one thing that maybe investors and traders alike have been grappling with over the last several weeks is this notion that you can see the kinds of volatility to the downside for those very key parts of that large cap tech market, yet pretty much flat performance on an index basis on a

year-to-date level for the broader S&P 500. Some say it's because it's not so much a wholesale risk-selling trade, it is just about rotating to other parts of the market. Are you seeing that within your fund world as well, this idea that there isn't panic yet, that people are just getting out of certain parts of the market only to go to others? Yeah, Don, we have about 40 ETFs diversified from income to technology, and we've definitely seen more people rotate out, take some chips off the table when it comes to technology, and rotate into some of the sectors like energy, materials, precious metals, that have had some alpha that are a little bit more value oriented. We've also seen a big inflow into our funds that really own high quality equities,

either here in the U.S. or internationally that are dividend payers. And then these funds specifically that we have also have the ability to tactically write covered calls as an additional source of income. So you have a couple percent of income from dividends, a couple percent of income, from options and that gives you maybe a 5 to 6% yield plus a fair amount of upside for total return. So those funds specifically, for example, our US high quality ETF Devo

has gained a little bit over 5% this year with the markets being flat. And our I Devo ETF, the international version has gained a little over 12% with international markets being up about 8%. So these high quality dividend payers combined with the ability tactically write covered calls are a means to participate in the market, maybe reduce a little bit

of volatility, but also get paid along the way. Christian, can you put some of this in context for us with regard to just the kinds of flows that we are seeing? Amplify, you point out, has a number of these offerings that have these kind of covered call or income enhancement strategies that use options and derivatives. How much do you think your assets under management has seen in terms of inflow and juxtapose that with the broader market overall for actively managed ETFs and what they are seeing for the demand in these kind of options-oriented strategies for these types of products. Yeah, so last year, if you look at the ETF industry as a whole, it gained 31% in terms

of AUM. At Amplify, we gained about 70% in terms of AUM. Our biggest flow leaders were these covered call. option income products. We've taken an approach that's a little bit different than many other sponsors who are focusing on maximum income. Instead, we're taking a yield smart approach versus a yield trap approach. And we'd say yield smart means attractive income, but still leaving room for capital

appreciation. We think that's the smart approach to income. And because of that, we think we've been able to set ourselves apart from some of these high yielding option income ETS that have outsized yields that may be bet on a single stock or look for stocks that are quite volatile and have juicy option income premiums, but also could be very volatile on the downside. So we think, you know, when it comes to this segment, there's a healthy appetite, certainly from a demographic standpoint, it makes sense. Then also we're in a midterm election year, which generally has seen the largest drawdown of all the election

years. The good news on that is once that drawdown has happened, you've seen the largest capital appreciation of any year 12 months after that midterm election historic drawdown happened. So I think investors are kind of being a little bit more cautious here and embracing for kind of this volatility that historically happens during midterm election years. And of course, years where we've seen now three years in a row of really solid market returns. Nick, what do you make about this volatility regime that we are in? We've seen some bouts of elevated volatility, but if you take measures like the CBOE volatility index for the S&P 500, the so-called VIX, when we see those spikes, it's nowhere near

the levels that we've seen around other, maybe more relative panicky, if you want to call those situations. In more recent memory, it was around kind of the tariff issues that we saw back in April. if you go a little bit more medium to longer term, it's certainly not even close to the kind of downside volatility that we've seen during things like the pandemic and certainly not the great financial crisis. So if you put all of that volatility movement in context,

what exactly do you make of what we are seeing right now and what exactly is attractive to you in terms of areas of the market that are either more or less than market volatile in these types of situations? Yeah, as you said, Don, it's been a, by and large from a surface level pretty quiet in terms of VIX. The other thing we've looked at too would be high yield credit spreads, right?

The sensitivity or the extra extra yield you're earning for lending to riskier companies and taking on that default risk. And I think underlying all of this has really been that we've been in a pretty resilient economic environment, right? 2% or so GDP growth likely to come in for last year. Certainly better than I think many people were expecting during kind of the depths after the Liberation Day announcement. but you've had, right, overall the economy has been pretty darn resilient, growing economy, fully employed labor forced by and large, income has continued to grow.

That's powered consumer spending. And ultimately, you've seen corporate profitability be very resilient, I think. We're looking at 13 or so percent year-over-year earnings growth. And so I think with all of that in context, there just hasn't been a ton of surface-level volatility on the overall market index. As you pointed out, and Christian alluded to, right, year-to-date, you have seen a bit of a rotation happening underneath the surface. equity markets where some of the leaders of the last couple of years really in the mega

tech space the hyperscalers have given way now and pulled back some but you've had a resurgence from smaller cap stocks from mid-cap stocks from value stocks foreign stocks for that matter too or some these areas that on a relative basis have been left behind now catching back up to the broader market but again underlying all that i'd say has been resilient overall economic growth and corporate profitability which ultimately drives markets you know nick it's interesting as well because as we talk about some of the bigger themes that are developing in this market, one of the places that we have seen people go in the past in times of uncertain economic outlooks or potential market volatility

have been in places like utility stocks, have been in places like consumer staples. You had mentioned the overall economic narrative, and just, I want to say yesterday, we saw one of the biggest consumer products names out there in General Mills, see a dramatic slide after its CEO told a conference here in New York that they're seeing consumers' strutely. and that that could be playing out into some of the way that they have to do business or their

financials going forward. Even consumer staples companies are feeling some of the pressure around the consumer or perhaps consumer sentiment weakening at times. What exactly then do you make of where people are moving to in this market, given that there are certain places that have been seen as relatively safe in the past that are maybe not immune to that kind of downside volatility even in this kind of environment? Yeah, I think one of the main things we've just seen is, is mega cap growth, what has been leading and dominating the market for the last number of years driven by a variety of different narratives, particularly being at the forefront of the AI revolution. And you've just seen, I think people have started to get a little bit concerned about what might

come ultimately of all the CAPEX that's been going, right? These companies have been massively profitable. They've been growing their revenues. But I think one of the interesting things is they've transitioned from very asset light to capital intensive, asset-heavy companies. I think people have just been concerned about, A, the magnitude of when revenue and profitability will come from that and the timing of it. And you've seen more of a rotation into relatively more inexpensive stocks, whether that be in the value universe, the mid-cap universe, the small universe. Economically, it's a very interesting environment because, right, we hear so much about the K-shaped economy where so much of the upper-income, upper spending consumers doing very well,

whereas perhaps some of those in the bottom half of the income distribution have struggled some. And you've seen that, I think, come through very much in consumer sentiment surveys, where it's been a bit of a paradox, which is how bad consumer surveys, overall consumer sentiment has been in an environment where the unemployment rate is still in the low 4%. You've seen consistent monthly job gains. Consumer disposable income continues to rise in aggregate, and yet you still have such a negative broad-based sentiment. Christian, I wonder if you take a look at your funds and the way that your models are stacking up right now, are there certain places that you are seeing more of a, I guess, tilt towards?

What types of stocks and what types of companies, what types of industries are now kind of coming through to your dividend in options income-based models? So you have basically a base of a certain type of company set and then the dividends they generate with the option income on top of that. Where are we seeing most of your portfolio tilt towards what kinds of companies? Well, right now I'd say international is leading and it's due to lower valuations. and certainly all the spending that's happening overseas on infrastructure and defense, also some of the U.S. dollar dynamics. Domestically here, we still see a lot of interest in a larger cap dividend payers. And then from a sector standpoint, we have natural resources, dividend income ETF, NDIV,

that yields just over 10%. Has a covered call aspect to it. that owns kind of oil, gas, chemical stocks, certainly energy, basic materials are leaders this year in the marketplace. We also have a junior silver miners covered call ETF. Certainly the move and gold and silver has helped the miners. And that has also been an area that people have looked at, has had some pretty good performance this year, up double digits. So natural resources, oil, gas, silver, dividend payers here in the U.S. and then outside of the U.S. just simply international stocks that are higher quality dividend paying, that would be probably

the area that we're seeing most of our inflows in on the income side. Now, Christian, along the lines of your particular funds and just the types of companies that are being invested in, there's a question, I guess, among some ETF investors that go toward some of these option income and dividend income hybrid strategies, about what exactly then dictates the option strategy for your particular holdies? In other words, if you're writing covered calls on your underlying portfolio, how far out of the money are you writing some of those calls to generate the income? And is there a methodology that you looked for, or is it a relative value trade based upon just how options prices are stacking up in that particular move?

Yeah, it's a great question because you have to do your due diligence on option income ETFs. They are created quite differently by sponsor. And even at Amplify, we have some different approaches. So our actively managed dividend ETFs as part of our Yield Smart lineup, which are Devo, I Devo, QDvo, tactically write covered calls generally in periods of market volatility and not that far out of the money, maybe five or 10% out of the money. And those calls are generally written on maybe four or five stocks at most out of a 25 to 30 stock portfolio. On the sector side where we're more index-based, many of the Yield Smart call ETS are written on a weekly basis on the underlying asset, and usually around 5 to 10% out of the money as well. The key here, at least an amplifies

yield smart approach is to leave room for capital appreciation because we think over time, markets go up and to the right, especially if you're selecting higher quality companies. You don't want to limit that upside. The downside from our perspective when we're out talking to investors is we never have the highest yielding option income ETFs. But when you look at total return, we generally have higher total returns than most option income ETFs that employ similar strategies. So again, we think being smart about yield means balancing attractive yield with upside or long-term capital appreciation and not just going for

the maximum possible yield. We think that's a yield trap. Now, Nick, I see a nodding along the way because you are an investment advisor. So there is a balance. There's a tipping point. And many investment advisors, I'm sure yourself included, look towards things like total returns, right? And there's only two levers in total return. It's the dividend income side of things from a stock, as well as the capital appreciation that goes along with it. Just how much do investors these days, in your mind, Nick, have to focus a little bit more on that kind of total return aspect of their holdings and their portfolio versus just say the capital appreciation, which you've seen a ton of pretty much since the lows of the great

financial crisis. How do you find what that balance point is? And is it different for different investors? We generally just advise for all of our clients to take a total return-oriented approach, and that's going to apply across stocks. It's going to apply across bonds and everything in between within a portfolio. And the reason being, as you mentioned, Dom, right, dividends or income or just one component of return capital appreciation being the other side. And we've seen probably too often people, I think, get a little bit too fixated on the

income component or yield chasing, as we'll often describe it, where they're going to try to optimize portfolio construction around income, And that can lead to all sorts of distortions we think in a portfolio, whether it be in the asset allocation and, you know, overly concentrated in certain areas of the market, moving out of bonds into higher yielding, perhaps equity-type securities. Within fixed income, it could be yield chasing in terms of moving further out interest rate risk, taking greater amounts of duration of portfolio, moving from investment grade to high-yield bonds, which have dramatically different risk and return expectations. Even within equities, if one's focused upon optimizing income alone, right, it could be. be high dividend yield focus strategies, which will have their own distortions in terms of, right, you're taking a value bet within markets, generally speaking, and that could be a good thing, but the question is, is that intended or not?

Sector over and underweights, right? Additionally, a dividend yield oriented strategy going to be overweight on financials, energy, consumer, staples, stocks at the expense of underweights to tech and communication services, and those could be intended, bets, or they might be unintended. But we think oftentimes we just see too often people taking an income-focused approach and that leaves a lot on the table. For us, we focus on having that total return orientation approach, knowing that we can manufacture dividends in a portfolio through systematic or ad hoc sales of a portfolio of securities, oftentimes do so with greater tax efficiency, given the fact that we'll be realizing long-term cap of gains as opposed to generating income in a portfolio, which, depending on the implementation, could be less efficient. form of income in a portfolio.

All right, Christian, I'm going to leave this conversation with one final question for you. In your career, you've done a lot with the ETF business, back to your Claymore days and everything else. I wonder if you could give us a little bit of, I guess, an idea of in that kind of decades-long span of fund management and ETF activity, where you think we hit the real interest catalyst in having options-based strategies as part of ETFs. Was there a certain era time frame, if you will, where people started to move a little bit more away from straight up dividend-paying stocks and those income strategies to ones that were more focused on the use of derivatives to generate

some of that income as well? Was there an approximate time frame and what actually really got it going? Yeah, Dom, I think it was about 10 years ago, roughly, that option income ETF started to come on the scene. You saw ETFs like QYLD that were option income ETFs on the NASDAQ 100, kind of formulaic index products. In 2016, we launched our first product Debo, which was the first actively managed option income ETF to write options on individual securities. For a number of years there until about 2019, there wasn't a lot of interest in the space. And then it really exploded with a variety of sponsors. And I think it was basically the recognition that options

can be another tool in this total return equation. Most income investors up to that point in ETFs only looked at dividends and didn't think of writing options to generate option income. Indeed, there's maybe even some legacy issues with leaving too much capital appreciation on the table. And many have been burnt with. covered call funds specifically in the closed-end fund space.

And I think the ETF space is always innovative. And they came to the table with a number of unique solutions that had been done before in the closed-end fund space or in the mutual fund space. And we're able to find a unique recipe that attracted investors. Unfortunately, I believe dumb, it's kind of jumped the shark now when you see some of these yield chase or yield games, sample type branded products that have over 100% yields.

Then you look at their total returns and they're down 70%. I think we've gone too far as an industry in some cases. And we're happy to stay in our lane at Amplify and the yield smart approach, diversified exposure that, again, balances capital appreciation with attractive income and tries to navigate that eye of the needle, which is not always that easy. and really requires great financial advisors, like Nick and his firm, to do due diligence on the ETFs, but also understand clients' risk tolerance and time horizons. And that's a valuable service in an area where we have nearly 5,000 ETFs in the market today.

It's an interesting cautionary note from a guy who actually runs a firm doing options override strategies to say that maybe we've jumped the shark on some of these options override strategies. Christian Magoon at Amplify. Thank you so much for the conversation. And Nick Ryder at Kathmere Capital, thank you very much as well. Fascinating. I wish we had more time. We'll have to continue this at some point now.

Now it's time to round out the conversation with some thoughtful analysis and perspective to help you better understand ETFs with our Markets 102 portion of the podcast. Nick Ryder, CIO at Kathmere Capital, continues with us now. You know, Nick, I'd like to pick up the conversation here for the podcast, kind of we left off in the online show. Christian had mentioned just how important it is for financial advisors like yourself and your colleagues and others in the RIA industry to understand the products that are being put out there and to find out if they're suitable for the types of clients and investors that they have.

I wonder from your perspective just how active are you in your particular firm at using things like option, dividend, hybrid income-based strategies in ETF format? Yeah. So the way we think about these types of strategies as a general rule would be within a our construct of a functional approach to asset allocation where we broadly divide the universe of investment strategies and asset classes into one of three buckets. Reserve being the safest bucket. Think of that as cash, high-quality investment grade bonds. The other end of the extreme being long only public equities is a default asset there where it's really about a multi-decade investment horizon or your driver's capital appreciation.

And there's some middle bucket, which we call risk-aware growth, where it's the desire to do, I want to generate better returns than what's available on high-quality investment-grade bonds, but I don't want to subject myself to the full volatility and downside risk of the equity market. And we think, generally speaking, these options-oriented equity strategies or the covered call writing strategies fit into that bucket. Thinking about really from a fundamental perspective, what options do is they reshape the risk-return expect distribution for whatever portfolio they're being applied to. And so when we take a covered

call strategy on top of a long only portfolio of equities, what we're really doing is ultimately making the lows less low and the high is less high. Now obviously there's a ton of nuance into how those strategies can ultimately be implemented, but as a general, that's how we think about them. How often are you as a CIO looking at tactically so, options prices, so that you can find either those opportune or tactical times to take advantage of heightened volatility and, you know, in things like options skew where things maybe go a little bit more towards having calls relatively higher value than where they should be against their respective puts on the downside. How often do you have to look at that kind of thing?

And are you actively day-to-day watching some of those dynamics in the market? We are not. We tend to take a longer-term approach to investing. And so to the extent we're making moves in shifting allocations on behalf of our clients. It's more with a multi-year type horizon, generally speaking around mean reversion. Now, do we look at things like that from time to time? Yes, to try to get a sense of what's happening in the market right before we were talking about the VIX. We can also look at other degrees of options, but I wouldn't say it's driving a day-to-day portfolio construction

decision for us. There are times when we think about covered call strategies to the extent one has a market outlook where, right, when a covered call strategy is going to shine, it's best to be in what we'd be defined as a sideways market, right? Where markets aren't necessarily strongly trending up or down because comfort calls will tend to do their best when you're getting modest increases in price or in down markets where we're getting that option income that's ultimately boosting returns. Now, when you say you're not actively using that kind of strategy, there are other strategies that you are more actively using. And many of those are tilted towards traditional kind of risk awareness and aversion type models depending on

your demographic, whether it's age, you know, whatever stage in life, you're, you're you're in any goals that you might be looking to do, whether it's college savings or buying a house, that sort of thing. I wonder if you could take us through from an investment advisor's perspective, just how much you are actively looking at tilting investor portfolios or making changes based upon some of those demographic shifts that you're seeing in your client base. Yeah, I mean, that's the main driver. We ultimately believe, first and foremost, when we come to building portfolios for our clients, is this fundamental principle that assets serve a purpose, and that purpose is to fund a lifetime

of spending and or gifting needs. And so ultimately when we build portfolios for clients, it starts with a client, taking that full understanding of what are they investing for, their long-term goals and objectives, what are their liquidity or spending needs from the portfolio, what are their personal preference, what is their tolerance for risk and the capacity to take risk. From that, it's then building a portfolio, and we take what we call a top-down approach, where that first step is then allocating across those three functional asset class buckets where it's building a reserve of safety assets for the portfolio where it's about principal protection income generation. It's on the other end of the extreme investing for long-term growth where we're underwriting it saying

this is a decade long or longer investment hold and we know we're going to deal with ups and downs along the way and then there may be a filling in of that middle bucket with the risk-aware growth where we say again we want to generate stronger returns than what's available on high-quality investment-grade bonds, but we don't want to subject ourselves to the severe sell offset periodically and unpredictably happen with equity markets. And that's right where some of these, I'd say higher income, higher yielding strategies could fit neatly in, whether it be covered call overriding on an equity strategy, whether it be high yield bonds, bank loans, things like that, where higher income for sure, but also with that

downside risk comes as a part of the strategy as well. How much more over the course of your firm's evolution have you till you, have you, tilted more towards using exchange traded funds versus straight up stock picking. You mentioned before that sometimes, you know, if you're on the extreme kind of, you know, I guess, riskiness side of the bucket, you'll go towards picking individual stocks that have longer term horizons, maybe over a decade plus. At the same time now these days, there are a plethora of different ETFs that track different baskets, indices, that sort of thing.

How much more has the ETF industry evolved? the point where you are using perhaps more ETFs than you have in the past, and what exactly is the philosophy that you have for stock picking individually and then using ETF baskets? We've actually pretty much from day one with our firm being very heavy ETF users, and that's really philosophically based on the perspective that we look over the long haul and say, markets are challenging to outperform and the data back set up. And so all else equal, we bias in towards an indexing oriented strategy. And, right, ETFs have been, you know, at the forefront of that kind of index revolution.

And so looking at the ETF vehicle is highly efficient for index oriented strategies. Then we will tilt from traditional market cap weight indexing in areas where we believe we have conviction. And so one of the areas we might do that would be factor tilted strategies, for instance. And those could come in a variety of different flavors. We've generally shied away from traditional stock picking, recognizing, again, the theory would suggest it's challenging to consistently outsmart other investors in the data back set up. And so, again, biasing more towards traditional indexing, but then applying overweights,

underweights, more driven by quantitative factors and signals of that nature, as opposed to trying to sharpen our pencil and do smarter analytical work to pick the next outperforming stock. So how much has the boom and the rise as of the late, and when I say that the last few years in particular, of actively managed ETFs versus traditional passive income kind of oriented, index-oriented type investments. There have been a lot more ETFs on the active front being launched in the last few years. What's your philosophy on the use of actively managed ETFs versus doing your own work on the passive instruments that will express the view that you want to express? Yeah, it's interesting. I've looked at this somewhat paradoxically, right? You've had this massive

rise in the growth of ETFs, and by and large, it's been very much index oriented. But when you look at it, generally speaking, most people are not using those because they want broad cap-made, market exposure, right? It's been growth in sector industry ETFs or thematic ETFs, which, yes, index and name only in a way, but people are really using index as an active vehicle implementation. For us, it's much more broad-based, kind of thinking about the major asset class across stocks, bonds, index orienting, and then again, you know, trying to implement those overweights, underweights, via

factors, et cetera, when we think they make sense. All right. It's a fascinating conversation. Just the evolution. of these ETF products and their use by investment advisors. Nick Ryder at Kathmere Capital, thank you so much for joining us. We appreciate it. Thanks, Tom. All right. That does it for the ETF Edge podcast. Thanks for listening. Join us again next week. We can always head over to etfedge.cnbc.com. Over the last few decades, technology has transformed our world in amazing ways.

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