How gold, bitcoin are moving beyond market hedge and boostin

Investor interest continues to increase for portfolio diversification beyond stocks and bonds, with gold hitting new record prices and bitcoin adoption growing.

As the Fed begins what could be a longer rate-cutting cycle, investing in these alternatives without sacrificing yield has become more important.

Wall Street and fund managers, most recently BlackRock, are responding with covered call strategies in the precious metals and crypto categories, but experts warn these income overlays limit upside return and require a tradeoff with traditional safe-haven benefits.

Gold keeps trading up to new record high prices. Bitcoin, while struggling to break out above recent record levels above $100,000, continues to find more mainstream adoption. But both the classic market safe-haven and its more risky new crypto rival are doing something other than just move up and to the right on the chart for investors: within some exchange-traded funds, they are also generating income.

Investors want exposure to alternative assets that do not move in lockstep with stocks and bonds. That comes at a time when stocks are also at record prices, and returns are concentrated in a handful of mega-cap tech stocks that now represents roughly 40% of the S

Even with less confidence in bonds, investors still want the steady income distributions associated with fixed-income. Attaching income overlays to non-yielding alternative such as gold and bitcoin is one way to satisfy these investor demands.

If your goal is to provide a hedge against volatility in the equity and bond market, then gold can provide a bit of a safe haven. If youre looking for reward opportunities, bitcoin has been very rewarding, said Todd Rosenbluth, VettaFis head of research, on CNBCs ETF Edge.

If youre looking for diverse ways to get income, then these covered call strategies that are here have become increasingly popular, he added.

The latest sign that Wall Street thinks this approach can work came this week, when the worlds largest asset manager, BlackRock, also the biggest ETF company through its iShares family, filed for a bitcoin premium income ETF.

Simplify Asset Management was one of the first to test this approach. Its [Simplify Gold Strategy Plus Income ETF (YGLD)] and [Simplify Bitcoin Strategy PLUS Income ETF (MAXI)] give exposure to gold or bitcoin futures and add an options strategy on top to generate income.

For clients who are funding this from a bond portfolio

they dont have to sacrifice on that income potential, Paisley Nardini, managing director and head of multi-asset solutions at Simplify, said on ETF Edge.

Some financial advisors have made the case that as the 60-40 portfolio fails to provide investors what it had in previous decades, larger allocations will be going to cryptocurrencies.

In terms of investor adoption, these ETFs remain relatively small. And compared to the traditional exposure to these alternatives, its not even close.

The Simplify Bitcoin Strategy PLUS Income ETF has a little over $51 million in assets under management, according to VettaFi. The[ iShares Bitcoin Trust ETF (IBIT)], which is its largest holding (about 83% of the fund), has roughly $85 billion in assets.

YGLD has approximately $44 million in assets, according to VettaFi. Traditional gold ETFs remain far larger. SPDR Gold Trust (GLD), for example, has approximately $120 billion in assets under management, according to VettaFi, while SPDR Gold Mini Shares Trust manages over $20 billion in assets.

NEOS Investments [NEOS Gold High Income ETF (IAUI)] also aims to offer monthly income by combining exposure to gold with enhanced returns from selling covered call options. IAUI has assets of over $115 million,

according to VettaFi.

Performance- and yield-wise, the gold and bitcoin income ETFs diverge. Simplifys bitcoin income fund, MAXI, has posted a year-to-date return of 12%, versus 17% for the iShares core bitcoin ETF, IBIT, according to ETFAction.com data. But it has generated a trailing 12-month yield of over 43%. The Simplify gold income fund, YGLD, has a year-to-date return of 69%, versus roughly 42% for the SPDR GLD ETF. Its yield is closer to 5%.

Still, Rosenbluth said the approach is an indication that investors are rethinking portfolio construction. BlackRocks decision to offer an ETF in the bitcoin income space will only serve to further confirm there is interest in the market in finding new ways to invest in these alternatives.

Gold has long been treated as a safe haven while bitcoin has been used as a risky diversifier. Adding income overlays changes those roles, Rosenbluth said, but caters to the growing demand. The income overlay can blunt performance qualities that make gold attractive, and cap the return upside that draws investors to bitcoin. However, Rosenbluth said it may appeal to some investors, particularly retail investors seeking high yields.

When you see a high level of income kicking off a strategy, thats what captures investors attention, especially at the retail level, Nardini said on ETF Edge.

The income approach, using covered call options, has exploded in popularity in the ETF space outside the gold and bitcoin context, with equity income funds like JPMorgans JEPI leading a new approach to stock investing, while other new ETFs are combining exposure to a select group of stocks, such as Warren Buffetts picks, with an income payment, or the portfolio of Bill Ackman with a similar income component.

Rosenbluth added that bringing these strategies into an ETF structure reflects the growing adoption of ETFs as a go-to approach to market exposures. I think theres just an ease of use. Its a more efficient way