Derivative income exchange-traded funds are gaining ground with financial advisors, as more firms look to expand their income-generating toolkit amid market volatility and evolving investor expectations.
According to a new report from Cerulli Associates, 15.2% of advisors it surveyed incorporated derivative income strategies into client portfolios in 2024, with an additional 7% planning to do so.
Adoption has been strongest among wirehouses, where more than one-fourth of advisors (26.3%) are using the products, followed by advisors at independent broker-dealers and national or regional broker-dealers, at 16.5% and 15.6%, respectively.
Cerulli defines derivative income ETFs as liquid alternatives that generate consistent income by selling options – a category that saw more than $26 billion in net inflows in 2023, followed by $29 billion in 2024. Advisor interest is expected to keep rising, especially among independent and regional firms, with 11.6% of IBD advisors and 9.5% of national or regional advisors indicating plans to increase allocations.
"[We believe] the desire for inflation-beating returns drives investor demand, and more fund providers are expected to enter the space in 2025," the firm noted in the report. “The convergence of derivative income strategies within the ETF framework transforms how providers design income-generating solutions.”
Advisors and issuers alike are exploring how these products fit into portfolios in an environment where yield, tax efficiency, and downside protection remain in focus.
Product development is ramping up to meet demand. Among ETF issuers surveyed by Cerulli in 2024, 6% reported they are actively developing derivative income ETFs, while another 13% are in the planning stages. While still a small segment of the market, derivative income ETFs have posted a five-year compound annual growth rate of 123%, trailing only digital asset ETFs.
The report also showed defined outcome ETFs also gaining traction – amassing $50.8 billion in net assets since the category's 2018 inception – though advisor uptake remains more limited. Cerulli’s data shows that only 13% of asset managers who offer alternative investment strategies currently offer defined outcome ETFs, and just 10% view it as a core product focus. Still, demand for more predictable investment outcomes may shift that stance.
“Ultimately, while derivative income and defined outcome ETFs have broadened access to alternative exposures and have enjoyed significant asset gathering over the past several years amid market volatility, challenges to adoption and concerns around performance, fees, and suitability remain,” Sally Jin, analyst at Cerulli, said in a statement unveiling the results.
“The success of such products reflects increasing investor demand for downside protection, emphasizing stable, predictable outcomes, especially during bouts of market volatility,” Jin said.
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