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Caroline Woods:Premium income ETFs promise something. Many investors want higher income, but how do they actually work and what’s the catch? Marc Zeitoun is head of North America product at Columbia Threadneedle Investments. He joins us here. Mark, great to have you at the desk.

Marc Zeitoun:I’m so excited to be here. Thank you for inviting me.

Caroline Woods:All right. So let’s get right into it for this ETF spotlight with stocks near record highs. We have the S&P and Dow at all time highs. Why aren’t investors simply buying into this market. Why are some choosing premium income ETFs instead.

Marc Zeitoun:It’s a great question. And I think a lot of it is rooted in the uncertainty of the markets. And that need for current income. And investors are always juggling the need for capital appreciation and current income. And how do I choose one or the other? And they typically will dial that asset allocation one way or the other, favoring bonds or favoring equities.

Marc Zeitoun:And I think that the appeal of premium income products is that they bridge that gap between bonds and equities, and they give you an opportunity to participate in the upside exposure, but it also have an income stream to support them.

Caroline Woods:So let’s get into the how for people who aren’t familiar, what are premium income ETFs. How do they generate income.

Marc Zeitoun:So Premium Income ETF at its core is going to be an equity ETF. The products that we build or build on, our ability to manage actively or systematically an equity exposure could be something like the Russell 1000 or something that is benchmarked to that, like our strategy rights. The income is generated by selling those short term calls.

Marc Zeitoun:So this is a covered call strategy. And that generates a persistent stream of income. And what is really interesting is that that source of income, is it the same as the source of income that comes from bonds. And it isn’t the same of the source of income that comes from dividends. So dividends, for example, they come because the corporate board has decided that they’re going to pay a dividend.

Marc Zeitoun:So that’s tied to corporate earnings. A bond is paying income based on interest rates and credit worthiness. But a premium income product is generating income from a third source. And that source is the uncertainty in the market, the ability to transfer risk to the owner. And so that’s what you’re doing is you’re selling that risk to generate the income.

Caroline Woods:So we have two funds to dig into. But before we do some might hear covered call strategy options market and think two risk too risky. What do you say to that.

Marc Zeitoun:I say that that is a slight over concern. Covered calls are basic strategies. You’re not taking wild risks. They’ve been proven, to work persistently. I think the only risk that exists with a covered call strategy is, at what point are you giving up a slight upside, because that’s what you’re fueling that income with. But the execution of options, these are very deep markets well traded and firms like ours have professionals have been doing this for quite some time.

Caroline Woods:So you mentioned something that I think is important. What are investors giving up for this income. And you’re saying slight upside a.

Marc Zeitoun:Slight upside because you’re selling short term calls that are out of the money. And in that way, if the underlying were to skyrocket within the short period of time that that option is available, you’re going to be haircut.

Caroline Woods:But in exchange you get.

Marc Zeitoun:And so and so in exchange, some of the products that are coming out like the ones that we are, they’re launching seven 9% dividend yield. And so in a way, one could argue you’re not giving up your trading. The future price uptick for today’s current income. And I think a lot of investors are faced with those choices on a daily basis.

Marc Zeitoun:How much cap appreciation am I willing to give up for the certainty of an income stream? And that’s what’s so exciting about premium income versus anything else, is that it’s a third dynamic as to pricing that income neither creditworthiness, neither dividend yield, but the uncertainty in the market.

Caroline Woods:Okay. So you just recently launched two funds in this premium income category, RCI, CDP. I explain the difference. Who is each designed for.

Marc Zeitoun:They’re both for the same client. And that client is the one that we were talking about who is looking for a way to introduce income without giving up all of that capital appreciation from the underlying, that a shift to bonds would have done. The difference between the two strategies is that one is based on a systematic, broad based, large cap blend, and the other one is a much more fundamentally driven, active, traditional active strategy.

Marc Zeitoun:Both of these have companion strategies that don’t have income overlays. And so what we’re trying to do is give clients the choice, if you like, the way that we’re managing it this way, the corpus of the product, then you have an option to tack on that additional income stream.

Caroline Woods:I’m curious who’s actually driving this demand. Other than these people who you say are looking for, you know, generating income without giving up some of the market gains, are these mostly retirees? Is it a younger investor? Who is it?

Marc Zeitoun:We haven’t done the work on that. We have noticed that this is an explosive area, and there are a handful of people who are providing the majority of the assets. We think that investors of all kinds want choice, so we’re just offering greater choice.

Caroline Woods:If we do, for the most part, most of the market strategist, but come on are still bullish on 2026, but don’t necessarily think that we’ll see 20% returns again this year. If we do, would we expect a premium income ETF to lag them?

Marc Zeitoun:I don’t know if it would live on a total return basis, because again, you’re you’re getting that income today and exchanging some of the cap appreciation on the outside. But really the story around the return stream is that it is largely the underlying that’s delivering the total return. This extra income is literally that it’s extra. And because of that, I don’t know that clients should just swap one equity exposure for another.

Marc Zeitoun:Asset allocation has become a bit more dynamic, and it’s an ability, especially through the ETF structure, to include that in an equity allocation and then to remove it when the investor doesn’t feel the time is right.

Caroline Woods:Okay. Two part question here. I want to get to why the time is right right now and even launch these funds. But before we get to that, talk to me a bit more about portfolio allocation. This does not replace equities. This does not replace bonds. No I’m sure you’ll say it depends on the investor. But how much of a portfolio should be allocated to things like premium and premium income ETFs?

Marc Zeitoun:I’m not going to tell you it depends on the investor. I’m going to tell you it depends on the investment objective and the total return. And I think that’s a fair answer. And every portfolio is trying to do something different. Obviously we at Columbia Threadneedle think about investing for the long term. So we’re not advocating tactical plays.

Marc Zeitoun:Tactical plays use ETFs that can be very difficult to understand. We are really down the middle. We’re just trying to enhance a portfolio, because we noticed that clients of a certain risk profile will prefer that cash in hand to tomorrow’s pan.

Caroline Woods:So for those those everyday retail investors who are tuning in saying is this for me? How do I know?

Marc Zeitoun:Well, I think the first thing that they should do is talk to their financial advisor. I think it’s really important, because it’s not only about whether it’s right for them, but whether it’s right for their goals. I mean, like an idea, but it’s not what I’m looking to do. And I think that with more choice, people can see the differences between the products in the market and make an informed assessment as to what works.

Marc Zeitoun:I would say it’s less about the income generation and more about that underlying exposure. So that RSI product that you mentioned, it’s based on an RSS product, which is just done phenomenally well against all benchmarks. That’s really the driver of the exposure. The income is extra.

Caroline Woods:Okay. So just to rehash the funds, our Columbia Research enhanced for premium Income ETFs, RSI and Columbia High Dividend Premium Income ETF, CDP, I mentioned they were both just launched recently. Why now? What’s changed in the market that makes these right for right now?

Marc Zeitoun:I think people are uncertain about the future of the markets. You know, we all are cautiously optimistic. Some of us are hopeful romantics, but at some point there’s an element of sobriety that needs to kick in. And taking some cash off the table in terms of current income is a great play, and we think that the time is right for people to use these kinds of solutions.

Caroline Woods:So does this perform better if the market falls?

Marc Zeitoun:Do you know it’s not like a buffered ETF? I would say that it performs well in sideways markets. Remember these income strategies. I mean these premium income strategies, they benefit from the volatility in the market. So if the market is just a smooth straight line up, probably not as good as that jagged return. And that’s what’s so a dividend yield is passively received from the client.

Marc Zeitoun:Whereas premium income is actively generated by the portfolio manager.

Caroline Woods:What’s a mistake that investors make when they’re trying to chase yields?

Marc Zeitoun:The higher the yield the better dividend yield strategies that simply or naively rank highest yielding to less yielding usually offer clients zombies, value traps. So I think it’s really about what I love about the strategies that we just launched, is that the income overlay is not necessarily tied to the securities selection. You really are getting the best of both worlds.

Caroline Woods:And what’s the biggest risk that investors need to be aware of when it comes to premium income?

Marc Zeitoun:ETF specifically, market shoots straight up parabolic lead and they will not participate in 100%. They’ll have a higher rating. I can’t quote a real number, but more of the order of 80 to 90%. And it’s that last five that might make clients feel FOMO and lead them to the wrong decision, because at the end of the day, they did participate, especially because they got the income in their hands.

Caroline Woods:Okay, I think this is a great time to pivot to our rapid fire game. Is this or that? We don’t do it all that often for ETF spotlights, but I have a few quick rapid fire questions for you. Are you ready?

Marc Zeitoun:I don’t know, we’ll see.

Caroline Woods:If you could only choose one higher income or bigger gains.

Marc Zeitoun:Me myself. Yes, I would say bigger gains.

Caroline Woods:Income today or growth tomorrow.

Marc Zeitoun:Growth tomorrow.

Caroline Woods:Buy and hold or adjust with the market.

Marc Zeitoun:Buy and hold.

Caroline Woods:Reinvest the income or spend the income.

Marc Zeitoun:Reinvest it. But think about what I could have on.

Caroline Woods:One income ETF. Or build an income portfolio.

Marc Zeitoun:Build an income portfolio of income ETFs.

Caroline Woods:To in particular finish this sentence. The biggest mistake investors make when chasing income is the impatience. All right. We will leave it there. Thank you so much. So really appreciate you joining us. That’s Marc Zeitoun. He’s head of North America product at Columbia Threadneedle Investments. Thanks again Mark.

Marc Zeitoun:Thank you.

Caroline Woods:Marc. Explain how investors can generate income while maintaining equity exposure. If you’re interested in another approach to income investing, check out our full interview with Danielle Gretzky on Fixed Income ETFs.