Animal Spirits Podcast: Talk Your Book – Creating Monthly Income From Your Portfolio

Date: August 25, 2025
Hosts: Michael Batnick (A), Ben Carlson (C)
Guest: John Borrello (D), Senior Portfolio Manager, Invesco

Episode Overview

In this episode, Michael and Ben sit down with John Borrello to discuss the surge in popularity of monthly option income ETFs, focusing specifically on Invesco's Income Advantage ETF Suite. The conversation explores why option income products—often seen as "boring"—are thriving even as growth stocks outperform, and how these funds work to generate stable income for investors while managing risk.

Key Discussion Points & Insights

1. Why Are Income Strategies Booming in a Bull Market?

Timestamps: 00:41 – 03:15

• Psychological vs. Mathematical Appeal: Even during explosive market upswings (e.g., AI-driven bull markets), investors are flocking to income strategies, partly because they offer regular, psychological comfort ("I don't want all the smoke...I want some exposure, but not all the exposure." — C, 01:34).
• Yield Attraction: Seeing 8-10% yields attracts investors who want equity exposure without all the volatility or risk.
• Option Income’s Utility: Option income isn’t interest rate sensitive and provides a “diversifying source of yield” (D, 03:15). It solves for staying invested in equities while reducing portfolio risk.

2. Shift from Dividends to Option Income

Timestamps: 04:15 – 06:17

• Why Move On from Dividends? Dividend investing was becoming less attractive due to increased risk and sector concentration (e.g., in utilities, mortgage REITs).
• Option Income Advantages: Option-based ETFs allow for higher-quality, more diversified exposure with potentially better yields and lower risk:

  "We started to get concerned that the amount of risk...to generate attractive yields was not as attractive anymore.” — D, 04:36

3. How the Income Advantage ETFs Operate

Timestamps: 06:17 – 09:54

• Consistent Strategy Across ETFs: The NASDAQ (QQA), S&P 500 Equal Weight (RSPA), and MSCI EFA (EFAA) all use the same strategy: index-based options overlays, not options on individual stocks.
• Tax Implications: Option income is paid as ordinary income (1099), with no return of capital and no tax straddle issues (D, 07:24).
• Income Stability: The funds systematically adjust option strike prices to keep yields consistent, rather than allowing income to vary wildly with market volatility:

  "We've built it such that the yield does not fluctuate very much and very much by design...” — D, 08:33

4. Behavioral Considerations and Pitfalls of “High Yield” Products

Timestamps: 09:54 – 14:49

• Behavioral Anchor: Reliable monthly income helps clients stay invested—much like investors rely on dividends from blue chips for psychological comfort.
• Yield ≠ Return: Some ETFs show “crazy, egregious yields” (e.g., 100%) which are unsustainable and often a return of capital, misleading investors:

  "Yield is not the same as return...if a fund is delivering...100% annualized yield...after one year, they’re going to return all of your money back.” — D, 11:05

• Responsible Design: Invesco targets sustainable yields (10% on QQA, 9% RSPA, 8% EFAA), aiming for both yield and Net Asset Value (NAV) growth.

5. Managing Expectations: Upside, Downside, and Asymmetry

Timestamps: 14:49 – 18:43

• Upside/Downside Capture: Expect roughly 75% participation in upside/downside (beta ~0.75), with a goal of capturing more upside than downside.
• Not Just Partial Position Sizing: These ETFs are intended to beat the “just buy 75% of the index” approach thanks to the unique risk-reduction and the options return component.
• Income as Spending Permission: Many retirees want to “live off the income” rather than sell shares. Monthly distributions can make this feel safer and more predictable than self-managing withdrawals.

6. Technical Differentiators & Risk Management

Timestamps: 18:43 – 26:54

• Laddering/Lifecycle Approach: Options positions are staggered (1/20th per day), reducing the luck/path dependency associated with rolling all at once, e.g., only on “third Fridays”:

  “We get 20 bites of the apple per month...and that’s really helpful in terms of smoothing the risk-return profile.” — D, 20:19

• Adaptability: This daily laddering allows adaptation to volatile environments, such as sudden sell-offs and quick recoveries, unlike static monthly strategies:

  "We were able to move pretty quickly and adapt to the market conditions. Almost like the Bruce Lee quote, be water, my friend." — D, 25:15

• Worst-Case Scenarios: The fund will underperform in sharp, prolonged rallies (since upside is partially capped) and is designed to outperform in down and flat markets, providing income and risk reduction.

7. Responsible Income: Avoiding Excess

Timestamps: 23:23 – 24:02

• Balanced Option Overlay: Only half the portfolio is overlaid with options, ensuring growth isn’t sacrificed for income.

8. Final Differentiators & Where to Learn More

Timestamps: 24:02 – 27:10

• Transparency & Education: Invesco emphasizes educating investors on design and differences in the space. Their focus:

  "All of these are built differently. It's really important to look under the hood." — D, 24:15

• Adaptive Management: Daily adjustments versus weekly or monthly ensure more responsive risk management.
• More Info: For further details, listeners are directed to Invesco’s Income Advantage webpage.

Notable Quotes & Memorable Moments

• "I don't want all the smoke, I want some exposure, but not all the exposure." — Ben (C), 01:35
• "Yield is not the same as return. If a fund...has 100% annualized yield...that means they're going to return all of your money back to you." — John (D), 11:05
• "There is no free lunch. There's no way to support those yields if you're not actually earning." — John (D), 12:37
• "We want our NAV to be growing at the same time that we're also delivering those attractive yields." — John (D), 13:46
• "Almost like the Bruce Lee quote, be water, my friend. We were able to move those strike prices as the environment was changing." — John (D), 25:15

Timestamps of Key Segments

• 00:41: Why option income ETFs make sense in a bull market
• 04:32: Shift from dividends to option income
• 06:38: Consistency of strategy across ETFs; how the overlay works
• 09:54: Behavioral/pyschological reasons for income products' popularity
• 10:59: Pitfalls of ultra-high-yield ETFs
• 14:49: Risk/reward profile (upside/downside capture)
• 18:04: Income provides "psychological permission" to spend
• 20:19: Path dependency and laddering options trades
• 21:58: What can go wrong with these strategies
• 24:15: What differentiates Invesco's approach

Summary Tone

Conversational, practical, occasionally humorous, with an emphasis on behavioral finance and insider transparency. The discussion carefully distinguishes responsible option income implementation from headline-grabbing, misleading products.

For More Information

Interested listeners are guided to Invesco’s website for deeper dives and resources on the Income Advantage ETF Suite.