Gen Z investors are chasing ‘eye-popping yields’ to free them from their 9-to-5s — but are the risks worth it?

Core Insights - Aggressive ETFs with yields over 8% have grown to approximately $160 billion in size over the past three years, indicating a significant trend in the investment landscape [1][2] - Investors are increasingly turning to complex derivative-based ETFs for higher dividends, moving away from traditional dividend-paying stocks [2][5] - This shift is particularly popular among younger generations, such as Gen Z, who are seeking alternative investment strategies to achieve financial independence and early retirement [3][4] Investment Strategy - The traditional strategy involves purchasing shares of established companies with a history of paying dividends, holding them long-term, and collecting dividends for retirement [1] - Newer strategies involve ETFs that utilize derivatives, such as covered calls, to generate higher dividend payouts, but this approach may limit long-term capital appreciation [5][6] Risks and Considerations - Derivative-based ETFs may cap potential gains, as they are required to sell stocks at predetermined prices, potentially missing out on significant value increases [6][7] - These ETFs are subject to higher tax burdens since their payouts are taxed as ordinary income rather than qualified dividends, which could impact net returns [8] - Experts suggest that these funds may underperform compared to simpler investment strategies like the S&P 500 over long periods [7] Portfolio Management - It is advisable to limit exposure to derivative-based ETFs within a diversified portfolio that includes traditional dividend stocks and growth assets to balance risk and potential returns [11] - Investors should consider management fees and tax implications when investing in dividend ETFs, as these factors can affect overall investment income [12]