Why Retirees Should Avoid 100% Return of Capital ETFs Like COIW and Opt for Sustainable Income Alternatives

For retirees seeking stable income, the allure of high-yield ETFs like the Roundhill COIN WeeklyPay™ ETF (COIW) can be tempting. However, its structure-reliant on 120% leverage tied to Coinbase stock and weekly return of capital distributions-poses significant risks that undermine long-term income sustainability. This article argues why retirees should avoid COIW and instead consider alternatives like the JPMorgan Equity Premium Income ETF (JEPI) or the Fidelity Enhanced High Yield ETF (FDHY), which balance income generation with lower volatility and tax efficiency.

The Risks of COIW: Leverage, Volatility, and Return of Capital

COIW is designed to deliver weekly distributions by leveraging 1.2 times the performance of Coinbase (COIN) stock according to Roundhill. While this structure amplifies returns in bullish markets, it introduces extreme volatility. For instance, COIW's 20-day volatility stands at 48.37% and its 50-day volatility exceeds 80.03% according to Roundhill. Such volatility is unsustainable for retirees seeking predictable income, as sharp drawdowns could erode capital during market downturns.

Moreover, COIW's distributions are primarily classified as return of capital (ROC), not taxable income according to Roundhill. While ROC distributions reduce tax liability in the year received, they also lower the investor's cost basis. This creates a hidden risk: when shares are sold, the reduced cost basis increases capital gains taxes as research shows. For example, an investor who receives $10,000 in ROC distributions over five years would face a higher tax bill if they later sell the ETF at a profit. This structure prioritizes short-term cash flow over long-term capital preservation, making it ill-suited for retirees with limited time horizons.

Sustainable Alternatives: JEPI and FDHY

Retirees seeking reliable income should consider alternatives like JEPI and FDHY, which employ strategies that balance yield with risk mitigation.

JEPI: Covered-Call Strategy for Steady Income
The JPMorgan Equity Premium Income ETF (JEPI) generates income by selling call options on low-volatility, value-oriented S&P 500 stocks according to ETF Database. This approach yields an 8.38% dividend while capping downside risk during market declines according to ETF Database. JEPI's 20-day volatility of 9.24% and beta of 0.6 according to ETF Database make it far less volatile than COIW, ensuring more predictable cash flows. Additionally, JEPI's monthly distributions provide retirees with a consistent income stream, unlike COIW's weekly payouts, which can fluctuate wildly with market conditions as research shows.

However, JEPI's distributions are taxed as ordinary income, which may result in a heavier tax burden compared to ROC distributions. For instance, an investor earning $50,000 annually from JEPI would pay approximately $8,500 in taxes under the top 25% U.S. tax bracket according to Dividendology. While this is higher than COIW's ROC structure, JEPI's income sustainability and lower volatility justify the trade-off for retirees prioritizing long-term stability.

FDHY: High-Yield Bonds for Income with Diversification
The Fidelity Enhanced High Yield ETF (FDHY) focuses on junk bonds, offering a yield of 7.17%–8.38% according to ETF Database. By investing in below-investment-grade debt, FDHY balances income generation with diversification across sectors and issuers according to ETF Database. Its 0.45% expense ratio according to ETF Database is competitive, and its active management allows it to adjust holdings in response to economic shifts. While high-yield bonds carry credit risk, FDHY's rules-based approach mitigates defaults by focusing on BB- and B-rated securities according to ETF Database. For retirees, this strategy provides a middle ground between COIW's speculative leverage and JEPI's equity-linked income.

Tax Efficiency and Income Sustainability

COIW's ROC structure may initially appear tax-advantaged, but its long-term implications are problematic. As noted, ROC distributions reduce the cost basis, leading to higher capital gains taxes upon sale as research shows. In contrast, JEPI's ordinary income taxation is predictable, and FDHY's high-yield bond income is subject to standard tax rules but benefits from ETF tax efficiency due to in-kind redemptions according to JPMorgan.

JEPI's covered-call strategy also offers downside protection during market volatility according to ETF Database, a critical feature for retirees. FDHY, while riskier than JEPI, provides diversification across debt instruments, reducing exposure to equity market swings according to ETF Database. Both alternatives outperform COIW in terms of income sustainability, as their strategies are less reliant on the performance of a single stock (COIN) or leveraged derivatives.

Conclusion

Retirees should avoid 100% return of capital ETFs like COIW due to their high volatility, leveraged structure, and hidden tax risks. Instead, they should prioritize sustainable income alternatives like JEPI and FDHY, which offer diversified, lower-volatility strategies. JEPI's covered-call approach and FDHY's high-yield bond focus provide retirees with predictable income streams while mitigating the risks inherent in speculative, leveraged products. In an era of market uncertainty, prioritizing income sustainability over short-term yield is essential for preserving retirement capital.