The Income Dilemma: How High-Yield ETFs Trade Growth for Dividends

In the ever-evolving landscape of exchange-traded funds (ETFs), investors face a perennial question: Should they prioritize income generation or total returns? This tension is starkly illustrated by the contrasting performances of SPYT (a proxy for broad market exposure) and XYLD, the S&P 500 Covered Call ETF. Over the past five years, these funds have embodied the trade-offs inherent in income-focused strategies, offering critical lessons for investors navigating the delicate balance between yield and growth.

The Performance Gap: Total Returns vs. Dividend Yields

From March 2024 to December 2025, SPYT delivered a total return of 26.28%, translating to an average annual return of 14.03%. In contrast, XYLD, which employs a covered call strategy to enhance income, posted a YTD return of -0.06% in 2025. Over a longer horizon-10 years-SPYT's annualized return of 14.84% dwarfs XYLD's 7.91%. These figures underscore a fundamental reality: strategies prioritizing income often sacrifice capital appreciation.

XYLD's allure lies in its dividend yield. With a trailing twelve-month (TTM) yield of 12.75%, it has consistently outpaced SPYT, which does not explicitly report a comparable metric according to Portfolios Lab. In 2024 alone, XYLD's TTM yield reached 11.54%, a stark contrast to SPY's (a benchmark S&P 500 ETF) yield of approximately 1.11% according to data from Portfolios Lab. However, as data from Portfolios Lab reveals, these high yields have not translated into superior total returns. For instance, in 2024, XYLD returned 19.49%, while SPYT managed 13.04% according to Total Real Returns. The gap narrowed further in 2025, where XYLD's negative return highlighted the fragility of its strategy in certain market conditions.

The Cost of Income: Expense Ratios and Risk-Adjusted Returns

XYLD's underperformance is compounded by its expense ratio of 0.60%, significantly higher than SPY's 0.09%. While this 0.51% difference may seem modest, it erodes net returns over time, particularly in low-volatility environments where covered call strategies struggle to justify their costs.

Risk-adjusted metrics further expose the limitations of XYLD's approach. SPY's Sharpe Ratio of 0.87 and Sortino Ratio of 1.30 outperform XYLD's 0.51 and 0.86, respectively. These figures indicate that SPY generates more return per unit of risk, a critical consideration for long-term investors. Meanwhile, XYLD's lower volatility (14.59% vs. SPY's 19.72%) and smaller maximum drawdown (-33.46% vs. SPY's -55.19%) suggest it may appeal to risk-averse investors, but its inability to capitalize on upward trends remains a liability.

The Covered Call Conundrum: A Strategy Out of Sync?

XYLD's strategy-selling call options on S&P 500 constituents to generate income- historically thrives in volatile markets. However, the past five years have been marked by prolonged bull markets and low volatility, conditions that limit the effectiveness of covered calls. By capping upside potential through option sales, XYLD forgoes participation in market rallies, a trade-off that has proven costly in recent years.

This dynamic is evident in the funds' correlation of 0.81, indicating they move in tandem but with divergent magnitudes according to Portfolios Lab. During the 2024 bull run, SPY's 10.72% YTD return contrasted sharply with XYLD's -0.06%, illustrating how structural constraints can derail even well-correlated strategies.

Implications for Investors

The SPYT-XYLD comparison offers a cautionary tale for income-seeking investors. While high yields are tempting, they must be evaluated in the context of total returns, expenses, and market conditions. As Total Real Returns notes, XYLD's 10-year total return of 144.66% pales next to SPY's 406.56%. For investors with long time horizons, the compounding power of growth-oriented strategies often outweighs the immediate appeal of dividends.

However, XYLD retains a niche role in portfolios requiring stable income, particularly during periods of heightened volatility. Its performance in 2024-when it briefly outperformed SPYT-demonstrates that its strategy can shine in specific environments. Yet, as 2025's negative return shows, relying on such strategies without a clear market outlook can lead to disappointment.

Conclusion

The underperformance of income-focused ETFs like XYLD highlights the inherent trade-offs in ETF strategy design. While they offer attractive yields, their structural limitations-capped upside, higher expenses, and subpar risk-adjusted returns-often undermine long-term growth. For investors, the key lies in aligning these strategies with broader portfolio goals and macroeconomic realities. In a world where markets reward participation in upward trends, the income dilemma remains a test of patience, discipline, and foresight.