Best ETFs for Passive Income

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Welcome to Wealth Wednesday! Most people have no idea how simple dividend investing can be.

Dear Investor,

High-yield dividend ETFs can produce reliable cash flow, but those bigger checks often come with slower, and sometimes negative, share-price growth. Keep that trade-off in mind before you chase a two-digit yield.

I get a steady stream of questions from readers who want income without the headache of managing a portfolio of individual stocks. While I’m personally more focused on growth stocks and long-term capital appreciation, I completely understand why some investors prioritize income.

For people in that camp, a few well-chosen ETFs that specialize in cash flow can turn a portfolio into a reliable paycheck. Below are 4 funds income investors often consider when they want consistent dividends. I’ll explain what each fund actually owns, how its strategy works, and how much cash a $10,000 position would have produced at the latest distribution rate.

WARNING: High-yield dividend ETFs can produce reliable cash flow, but those bigger checks often come with slower, and sometimes negative, share-price growth. Keep that trade-off in mind before you chase a two-digit yield.

1. J P Morgan Nasdaq Equity Premium Income ETF • Yield 11.14%

How the fund works
JEPQ buys many of the familiar tech giants that live inside the Nasdaq 100. Think Apple, Amazon, Microsoft, and a long tail of other growth names. On top of those shares, the portfolio managers sell call options, which allow other investors to buy the fund’s stock at a set price in the future. Selling those options generates premium income, and the fund passes that premium along to shareholders.

Why the yield is so high
Options on volatile tech stocks command rich premiums. Combine those premiums with the small dividends the underlying stocks already pay and you have a double-digit yield, even though the Nasdaq itself yields almost nothing.

Trade-offs you should know
When you sell calls, you cap potential upside. If mega-cap tech rallies 20% in a month, JEPQ won’t keep pace. It sacrifices some price growth in exchange for a steady cash stream. In sideways or choppy markets, that trade-off feels great. In raging bull markets, it can sting a bit.

What $10,000 looks like
A $10,000 stake at an 11.14% yield pays roughly $1,114 over 12 months. The fund distributes monthly, so expect about $93 per month before taxes and fees.

2. Invesco S&P SmallCap High Dividend Low Volatility ETF • Yield 7.51%

How the fund works
XSHD starts with the S&P 600 SmallCap universe and then screens for 2 qualities that matter for income investors: high dividends and relatively low volatility. The final list is a concentrated basket of 60 smaller companies, often in sectors that throw off healthy cash, such as regional banks, insurance, utilities, and consumer staples.

Why the yield is so high
Small companies must pay more to catch investor attention, so their dividend yields tend to sit well above those of mid and large caps. The fund rebalances semi-annually to keep only the highest yielders that still meet the low volatility filter.

Trade-offs you should know
Small-cap companies feel economic slowdowns sooner than large caps. They rely more on bank lending, and their earnings can swing wider. The low volatility screen helps reduce wild price moves, but the fund can still lag the broader market during speculative tech rallies.

What $10,000 looks like
A $10,000 position generates about $751 per year. Paid quarterly, that works out to roughly $188 every 3 months, before taxes and the modest expense ratio.

3. Goldman Sachs S&P 500 Premium Income ETF • Yield 8.14%

How the fund works
GPIX owns a high-quality slice of the S&P 500, tilting toward companies with strong free cash flow and stable fundamentals. The managers then write call options on that portfolio, similar to the strategy used by JEPQ but applied to a broader mix of sectors. The premiums collected from selling those calls form the bulk of the fund’s 8%-plus yield.

Why the yield is so high
Selling calls on blue-chip stocks still earns solid premiums, and the fund enhances that income stream by selecting stocks that already pay above-average dividends. You get a steady payout supported by both option income and core dividends.

Trade-offs you should know
Like any covered call strategy, GPIX trades some upside for income. If the market surges, the call options limit capital appreciation. The fund tries to balance that risk by rotating its option positions and holding high-quality underlying stocks that can grow dividends over time.

What $10,000 looks like
At an 8.14% yield, $10,000 would have paid roughly $814 over the last year. Because GPIX distributes monthly, you’re looking at about $68 per month before taxes.

4. Invesco KBW High Dividend Yield Financial ETF • Yield 13.31%

How the fund works
KBWD focuses on the highest-yielding names in finance, including business development companies, mortgage REITs, regional banks, and insurance firms. Many of these businesses operate under structures that require them to pay out most of their taxable income, which pushes yields into double-digit territory.

Why the yield is so high
Mortgage REITs and BDCs distribute nearly all earnings to maintain their special tax status. That requirement, combined with leverage in their business models, creates large quarterly payouts.

Trade-offs you should know
The same leverage that boosts income can cut both ways. Rising interest rates squeeze borrowing costs and book values. KBWD also carries a higher expense ratio than most dividend funds, so part of that generous yield goes to fund management.

What $10,000 looks like
A $10,000 stake in KBWD would have produced about $1,331 in the past year. After expenses, you still collect more than $1,100, paid monthly.

Putting the 4 together

For income-focused investors, an even split across these 4 ETFs would blend to roughly a 10% yield after expenses. That means $40,000 could bring in $4,000 per year in cash flow without the need to manage a list of individual stocks or track dozens of earnings reports. Each fund earns its yield in a different way and comes with a different risk profile. Understanding those trade-offs is where the real work is.

Final word

I don’t personally use high-yield ETFs like these in my portfolio because I’m focused on long-term growth and capital appreciation. But I know many people are in a different season of life or have different financial goals.

Whether you’re building income for retirement or just want a passive stream of monthly cash flow, these types of funds can be powerful. Just make sure to fully understand how the income is generated, what risks come with it, and whether the trade-off fits your investing style.

For many, the appeal of monthly dividends and reliable cash beats the ups and downs of chasing growth.

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