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Investors who want to balance growth and income in their portfolios are stuck with a conundrum.

For growth, you can invest in large-cap stocks through something, such as the Vanguard S&P 500 ETF (VOO), but that only generates a yield of about 1.2% right now. It’ll satisfy your goal of long-term capital growth, but it’ll probably leave you well short of any income goals.

For income, you can target bonds, CDs or even high-yielding dividend stocks. But yields on those products might only safely top out at around 4% and you could be sacrificing a lot of long-term growth potential in the process.

Ultra-high income seekers often look to covered call ETFs, such as the Global X S&P 500 Covered Call ETF (XYLD). These products can throw off yields in the 10-12% range, but they usually cap most if not all share price appreciation potential in the process. In other words, lots of yield but zero growth.

I think what a lot of income investors are looking for is something that captures most equity upside potential while throwing off a significantly above-average dividend yield. Something that does a better job of bridging the gap between growth & income. Something that let’s you have your cake and eat it too!

Could “Yield Stacking” Be The Sweet Spot Between Growth & Income?

If there’s one thing that the ETF industry excels at, it’s innovation! The good folks over at Pacer also identified this gap as a problem in need of a solution. I recently talked with Sean O’Hara, the president of Pacer ETFs, for a piece published on Investor’s Business Daily and one of the products we talked about was the Pacer Metaurus U.S. Large Cap Dividend Multiplier 400 ETF (QDPL). This is a fund that gives up a modest amount of S&P 500 exposure in exchange for 4 times the dividend yield of the index.

Even as yields have come up substantially from where they were just a couple years ago, the idea of how best to balance growth and income objectives within the same portfolio has been a long-term problem. It was a huge problem for most of the time between 2009-2021 when the Fed kept the Fed Funds rate at 0% and investors had few good income options at all. Even today during a time when investors can still capture a 5% yield on risk-free Treasury bills (for now at least), it’s still largely a decision of which side of the equation are you willing to sacrifice.

QDPL helps solve that. In most situations, you get 85-90% of the exposure to the S&P 500 while also capturing quadruple the S&P 500 yield.

Here’s how it works:

Without getting too deep into the weeds on the operational mechanics of this fund, QDPL takes a portion of the fund’s principal to purchase annual futures contracts on the dividend payment piece of the S&P 500. As of the fund’s 2nd quarter distribution, QDPL has a trailing 12-month distribution yield of just under 6%.

That combination - a 6% distribution yield plus 89% S&P 500 exposure - compares very favorably to potential alternatives.

• The S&P 500, obviously, has 100% exposure with a 1.2% yield currently.

• XYLD, which has a 100% option overlay offers an 11-12% yield right now, but also offers little if any upside and 100% potential downside.

• The Global X S&P 500 Covered Call & Growth ETF (XYLG) has only a 50% option overlay, which reduces yield but also allows more upside capture. It offers roughly a 6% yield with, in theory, 50% upside and 100% downside potential.

You can see why QDPL is attractive.

“Yield Stacking vs. Alternative Strategies”

QDPL just hit its 3rd birthday. Let’s take a look at how the fund’s returns compare to those of VOO, XYLD and XYLG over that time.

Even though it’s only three years, it’s a good window to look at because it includes both the 2022 bear market and the subsequent bull market that followed, two very different market environments.

While QDPL just narrowly underperforms the S&P 500, it tracks the index pretty closely throughout. It’s not surprising that it falls off the pace in 2024 because that was a very growth-driven market led by just a handful of stocks. When stocks are really cranking, you’d expect share price gains to offset the extra income received and then some in QDPL. That’s exactly what we see here.

QDPL also outperforms both XYLD and XYLG by fairly substantial margins. Traditional covered call strategies generally need calm and/or sideways trending markets in order to outperform. 2022, 2023 and 2024 have been none of those, so their underperformance is to be expected.

But we know that the risk profiles of these products is very different. The S&P 500 will be the most volatile of the bunch, but the risk mitigation benefits of the others are unmistakable.

Historically, QDPL rates as about 15% less volatile than the S&P 500, which is significant considering the similarity of historical returns. That would mean QDPL has generated roughly 90% of the S&P 500’s returns with 85% of the risk over its lifetime.

In my opinion, any product that captures 85-90% of stock market upside, but generates superior risk-adjusted returns in the process is worth considering as a core piece in your portfolio.

That doesn’t mean, however, that traditional covered call strategies don’t have their place, even when used in conjunction with a product, such as QDPL. As O’Hara explains:

Final Thoughts

A lot of investors will want to stick with the S&P 500 and simply try to maximize their capital growth upside. There’s nothing wrong with that, but QDPL looks like a genuine alternative that could give you the best of both worlds, especially if you’re someone more focused on income.

This might be one of those few true opportunities where you don’t necessarily need to choose between growth and income. With QDPL, you can invest for the long-term knowing that you’ll likely maintain 85-90% exposure to the S&P 500, but also capture a 6-7% yield to cover your income needs in the meantime.

It’s a win-win for investors.