The Market Looks Expensive. This ETF Pays a 11.86% Yield While You Wait for It to Come Down

I’m not particularly enthusiastic about buying the U.S. stock market at today’s valuations. As of Sept. 21, the S&P 500’s trailing price-to-earnings ratio was estimated at 26.48, while the cyclically adjusted Shiller P/E was around 41. Those aren’t timing signals, and expensive markets can remain expensive for years, but both measures suggest investors are paying a substantial price for current and normalized earnings.

The usual response is to look somewhere else. You could tilt toward value or smaller companies, increase international exposure, or simply sit on more cash and Treasury bills. None is necessarily a perfect solution. Factor tilts can underperform for years, international stocks introduce their own risks, and cash can leave you sitting on the sidelines if expensive U.S. stocks keep climbing.

There’s another approach I find interesting for investors who want to remain invested while getting paid to wait: options income. Rather than relying entirely on stock prices moving higher from already elevated valuations, an options strategy can monetize volatility and generate returns when markets move sideways.

One of the more unusual implementations I’ve found is the Peerless Options Wheel Income ETF (WEEL). It currently has a distribution rate around 12%, but unlike many high-yield options ETFs, it isn’t simply writing covered calls against the S&P 500 or Nasdaq-100.

How WEEL’s Options Wheel Works

WEEL uses what’s commonly known as the wheel strategy, primarily through highly liquid sector ETFs rather than individual stocks. You can find investors using variants of this approach on communities like Reddit’s r/thetagang.

The first part involves selling out-of-the-money cash-secured puts. A put seller collects an upfront premium in exchange for agreeing to buy the underlying ETF at the strike price if it’s assigned. WEEL holds Treasury bills as collateral, so the cash securing those puts can continue earning short-term interest while the fund collects option premiums.

If the underlying ETF stays above the strike, the put expires and WEEL keeps the premium. The process can then begin again. If the price falls sufficiently and the position is assigned, WEEL takes ownership of the underlying ETF. It can then move to the second half of the wheel by selling covered calls against that position, collecting additional option premium until assignment.

The fund can rotate among different market segments depending on where its managers see attractive opportunities. Its recent exposures have included areas such as software, emerging markets, oil services, biotech, gold miners, silver and volatility-related strategies.

That’s one reason I find the strategy more interesting in an expensive market. WEEL doesn’t require the S&P 500 to keep marching higher to generate cash flow. Put premiums, covered-call premiums and interest earned on Treasury collateral can all contribute to returns.

There is plenty of risk involved. Selling puts means getting paid to assume downside risk. A severe selloff can leave the fund owning assets well above their prevailing market prices. Covered calls can subsequently limit the recovery if those positions rebound quickly. A 11.86% distribution should therefore be viewed as compensation for taking several risks.

WEEL’s Track Record Is Getting Interesting

The encouraging part is that WEEL’s high distribution hasn’t come at the expense of total return so far. I ran WEEL against the JPMorgan Equity Premium Income ETF (JEPI) using Testfolio from May 16, 2024 through Sept. 21, 2026, giving us approximately 2.35 years of comparable history.

Over that period, WEEL produced a 33.33% cumulative total return, equivalent to a 13.03% compound annual growth rate. JEPI returned 19.31% cumulatively, or 7.81% annualized. WEEL accomplished that with higher volatility, at 12.47% versus 10.72% for JEPI. Its maximum drawdown was also deeper at 17.43%, compared with 13.26% for JEPI. But the additional risk has been compensated so far. WEEL posted a 0.72 Sharpe ratio versus 0.37 for JEPI.

That’s important because I don’t judge an income ETF primarily by its distribution rate. If a fund pays 11.86% while continually losing NAV, the headline yield isn’t telling you much about what you’re actually earning. WEEL’s 33.33% cumulative total return suggests that, over this particular period, the strategy has generated economic returns.

The drawback is cost. WEEL’s gross expense ratio is 1.24%, including acquired fund fees and expenses, with a 0.25% contractual fee waiver bringing its current net expense ratio to 0.99%. That’s expensive compared with a conventional index ETF.

There’s also no guarantee its recent performance persists. The wheel tends to benefit from markets where option premiums are sufficiently rich and underlying assets don’t suffer prolonged collapses. A powerful bull market can also leave an options-selling strategy behind because repeatedly monetizing volatility means surrendering some upside.

For me, that’s the trade-off. If I thought U.S. stocks were cheap and positioned for another sustained expansion in valuation multiples, I’d rather own them outright through a low-cost index ETF. At today’s valuations, however, I can see the appeal of sacrificing some potential upside in exchange for a hefty distribution.

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