Options-income ETFs are rapidly becoming the hottest category in the ETF market. According to research from the Nasdaq, around a quarter of the 1,100 ETFs that were launched in 2025 used options as a core part of their investment strategy. Meanwhile, the broader category has now grown to well over $100 billion in assets.

The explosive growth has been fueled by a market environment defined by volatility, geopolitical uncertainty, and a growing investor appetite for income. 

Speaking to The ETF Show, Mike Khow, Chief Strategist at YieldMax ETFs explained that “options are a form of insurance on equities. Options-income ETFs look to harvest some of that premium for income.”

That premium has become increasingly attractive to investors as volatility has risen. Khouw explained that elevated options pricing has been caused by geopolitical tensions like the shock to the oil markets from the US-Iran war and strong earnings, which have driven swings in major technology stocks.

“When stocks move around, you get a bigger bid to options,” he said. “And obviously, it’s been a good environment for us.”

Khouw believes the appeal of these strategies extends even beyond the current market cycle. After years of low interest rates and equity-driven returns, investors are looking more and more for income alongside capital appreciation. 

“I don’t think we can anticipate to see 20% year after year after year,” Khouw said of future equity market returns. 

“In a more inflationary environment, investors who are looking for total returns are probably going to find a better environment for options income strategies,” he added.

But understanding these products requires investors to think differently about performance. Khouw explained that yield alone is not the right way to evaluate options-income ETFs. Instead, he said investors need to focus on total return, including both distributions and changes in share price.

“If you have something that’s paying you 20% or 25% in distributions each year, and the underlying asset simply stays the same, you have a 25% total return,” he said.

That’s important for investors to understand, because these strategies do have clear trade-offs. Most options-income ETFs generate cash flow by selling options against underlying equities, while limiting the upside in exchange for income. 

“The trade-off is that because you sold an upside call, that stock can be called away from you,” Khouw said.

But YieldMax attempts to mitigate that cap by using covered call spreads instead of traditional covered calls, which allows investors to participate in a greater share of upward moves in the underlying stock. 

“If the stock goes higher, we want to make sure that we’re getting 70 to 80% of the upside,” he said.

At the same time, the category itself is evolving. The first wave of options-income ETFs were focused on single, high-volatility stocks like Nvidia or Tesla. But increasingly, issuers are shifting toward diversified portfolio-based approaches that combine options overlays with broader equity exposure. 

“The people who are looking at single stock strategies already know they either want to be long or short that stock,” Khouw said. “But there are also people who would much rather employ the strategy and then just say, ‘I want equity exposure.’”

For some investors, options-income ETFs remain tactical tools tied to specific views on volatility or individual stocks. But diversified approaches may serve as long-term portfolio allocations for investors seeking income without abandoning equities entirely. 

As the category grows, so does the need for investor education. These products are designed around outcomes, and not just price appreciation, and so understanding the mechanics underneath the yield has never been more important. 

Source: The ETF Show - Volatile Markets Boost Options-Income ETFs