My long-term financial goal is to generate enough passive income to cover my basic living expenses. Once I reach my target, I won't have to work to pay my bills. I also won't have to sell stock during retirement to fund my financial needs.
My strategy is pretty simple. I invest in income-generating assets each month as a march toward my passive income target. Exchange-traded funds (ETFs) are among the many vehicles I use on my journey to financial independence. Two that I plan to buy more of this June are Vanguard Total Bond Market ETF (BND 0.55%) and JPMorgan Nasdaq Equity Premium Income ETF (JEPQ 0.17%). Here's why I'm using these two ETFs to increase my passive income.
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An easy way to collect bond interest
Investing in bonds is one of the lowest-risk ways to generate passive income. However, it takes more work to manage a bond portfolio than stocks. You need to learn about bond ratings, building a bond ladder, and other factors that can affect returns. In the process of doing just that, I've found that investing in bond ETFs is the best way to gain exposure to the bond market and the fixed income they can generate.
One of my go-to bond ETFs is the Vanguard Total Bond Market ETF. The ETF provides broad exposure to taxable investment-grade U.S. dollar-denominated bonds. It holds bonds issued by the U.S. government, government agencies, U.S. corporations, and foreign companies and countries that issue bonds in U.S. dollars.
This ETF currently holds nearly 11,350 bonds. Nearly 69% of those bonds are from the U.S. government or government agencies. Meanwhile, about 18% have A-rated credit or higher, while the remaining 13% are BBB-rated bonds. These are all higher-quality bonds with a relatively low risk of default.
Because they have an average yield to maturity of 4.5% and an average effective maturity of 8.2 years, this ETF should provide a fairly stable stream of interest payments. It distributes the income it receives to investors each month.
The Vanguard Total Bond Market ETF provides investors with broad exposure to high-quality bonds for a very reasonable price, given its ultra-low 0.03% expense ratio. That enables investors like me to keep more of the interest income produced by the bonds it holds.
Income and upside potential
Writing covered calls is another strategy that many investors use to generate passive income. This technique can be very lucrative. However, it requires fairly active portfolio management.
An easier way to collect options income is to invest in the JPMorgan Nasdaq Equity Premium Income ETF. The fund's management team writes out-of-the-money call options -- that is, those above the current price -- on the Nasdaq-100 Index. That strategy enables the ETF to generate income and distribute it to investors each month. It can be a very lucrative strategy:
Image source: JPMorgan Asset Management.
As that chart shows, the fund has a higher income yield than several other asset classes, including U.S. government bonds and riskier -- and higher-yielding -- junk bonds. The yield shown is an annualization of its last distribution payment, which was higher due to market volatility in the period. Over the past 12 months, the fund's yield is a little lower at 10.4%, which is still very lucrative.
The options premium income the fund generates will rise and fall based on volatility and market pricing. However, it's an attractive place to potentially earn an outsized income stream.
In addition to the passive income, the fund provides equity market exposure. It holds a portfolio of stocks selected by combining an applied data science approach to fundamental research. It aims to construct a portfolio that will produce less volatile returns than the Nasdaq-100 while still providing investors with upside potential.
I like this ETF because it delivers a lucrative income stream and higher appreciation potential, which should help grow the value of my portfolio over the long term.
These ETFs make it easy to increase my passive income
I like to use ETFs to add more sources of passive income to my portfolio. I routinely buy more of these ETFs, which helps increase my passive income. This month, I'm buying more shares of Vanguard Total Bond Market ETF and JPMorgan Nasdaq Equity Premium Income ETF because they make it super easy to collect passive income from bonds and options.
