ETFs and Options (Including Income ETFs): Concepts I Clarified While Mapping Investment Instruments#

2026-01-25

To start investing “properly,” I think I should first map out what investment instruments I can actually use—before I even pick tickers.
But once I sit down to organize things, familiar words (ETF, options, futures, high-yield ETFs, etc.) can become surprisingly confusing. The concepts I thought I understood often feel fuzzy the moment I try to explain them clearly.

For me, ETFs were exactly like that. ETFs trade like stocks, but they’re also “funds.” That naturally leads to a few questions:

Who creates an ETF, and who runs it?
When I buy an ETF, where does my money actually go?
Why does an ETF’s price usually move near its NAV?

So in this post, I’ll do the following:

List the investment instruments I can choose from
Re-check the concepts that felt ambiguous (especially ETFs / options)
Use this as a starting point for later posts where I connect each instrument to “how I would invest in it”

Note: This is personal study notes, not investment advice.

Summary (just the conclusions first)#

An ETF is a “fund” that’s listed on an exchange and traded “like a stock.”
When I buy an ETF, the trade usually happens between investors (the secondary market), and the money usually goes to the seller.
The mechanism that keeps ETF prices from drifting too far from NAV is creation/redemption (the primary market, done by APs).
“High-yield ETFs” may distribute cash flows that are not traditional corporate dividends—e.g., option premiums (and sometimes ROC).
Futures are obligations; options are rights (you pay a premium to get that right).

1) A quick map of investment instruments#

When I list out what I can realistically invest in, it roughly looks like this:

Cash / cash equivalents (parking): high-yield savings, MMF, CMA (RP/MMW, etc.), money market / ultra-short bond ETFs, etc.
Deposits / savings: time deposits, installment savings, CDs / special-rate products
Bonds: government/municipal bonds, corporate bonds (IG to HY), bond funds / bond ETFs
Stocks: domestic stocks, international stocks
Funds: mutual funds (equity/bond/balanced/alternatives)
ETFs / ETNs: broad index, sector/theme, bonds, commodities, leveraged/inverse, etc.
Real estate / indirect real estate: physical real estate, REITs, real-estate funds
Commodities / real assets: gold (physical/bank account/ETF), oil/agri (often via ETFs/futures)
FX: foreign-currency deposits, FX-exposed / FX-hedged products
Derivatives: futures/options (high risk, complex)
Structured products / wrap accounts: ELS/DLS, wrap/trust (managed/advisory)
Crypto: BTC/ETH, stablecoins, earn/lending (counterparty/platform risk)
Credit / private lending: P2P (limited access depending on products)
Tax-advantaged accounts (the “container”): ISA / pension accounts / IRP (less “what you buy,” more “where you hold it”)

In this post, I’ll focus on the parts that felt the most unclear despite seeing them often—especially ETFs and options.

2) ETF vs ETN vs ELS — three similar names, different responsibilities#

These three names look similar, but the key difference is who ultimately stands behind the product.

2-1. ETF (Exchange-Traded Fund)#

One-line definition: a basket of assets (a fund) that’s listed on an exchange and traded like a stock
Usually tracks an index / asset basket
Key checks: fees, liquidity (volume/spread), tracking error (how closely it follows the index)

2-2. ETN (Exchange-Traded Note)#

One-line definition: essentially a broker’s promise (debt) to deliver an index return
So compared to ETFs, issuer credit risk matters more

2-3. ELS (Equity-Linked Securities)#

One-line definition: a structured product with conditional rules, e.g., “coupon if conditions are met, loss if they aren’t”
Depending on how the underlying (stock/index) moves, outcomes like coupon / early redemption / principal loss (knock-in) differ
The “conditional yield” comes with the trade-off that losses can become large in sharp drawdowns

3) Who makes ETFs, who trades them, and where does my money go?#

It’s correct to say ETFs trade like stocks—because they do.
But the most common confusing question is:

“If I buy an ETF, does my money go to the fund manager to buy underlying assets?”

In most cases, no.
That’s because I’m usually not buying a “newly issued ETF share,” but rather a share that someone else already holds.

3-1. The players#

Asset manager: designs the rules (index, method, fees) and manages the ETF
Investors (retail/institutional): buy/sell ETF shares on the exchange
Liquidity providers (LPs): help keep quotes available so trading doesn’t dry up
Authorized participants (APs): reduce price gaps via creation/redemption

3-2. Two markets: secondary vs primary#

Secondary market (exchange): ETF shares trade between investors (or via LPs).
- When I buy an ETF here, the money typically goes to the seller.
Primary market (creation/redemption): APs increase/decrease ETF shares.
- APs can deliver the underlying basket (or cash) to receive ETF shares (creation),
- or return ETF shares to receive the underlying (redemption).

3-3. NAV vs market price#

NAV: the ETF’s “internal value” based on its underlying basket
Market price: the real-time price on the exchange (supply/demand)

What keeps the market price from drifting too far from NAV is AP creation/redemption.

If the market price is too high vs NAV (premium) → APs can create shares to increase supply and narrow the gap
If the market price is too low vs NAV (discount) → APs can redeem shares to reduce supply and narrow the gap

It’s not perfect, but this mechanism tends to pull prices back toward NAV.
I find it easiest to remember it like this: “if price drifts, APs adjust supply to bring it back.”

4) Why ETFs can be great (and what to watch out for)#

4-1. Strengths#

Intraday trading: you can use market/limit orders like stocks
Price transparency: quotes and fills are visible in real time
Cost competitiveness (especially index ETFs): fees are often low
Easy diversification: a small amount can buy a whole basket
Easy building blocks: country/sector/bond duration/REITs/commodities, etc.

4-2. Watch-outs#

Liquidity (spread): thin ETFs can be expensive to trade
Tracking error / deviations: may not match the index perfectly
Too easy to trade: frequent trading can hurt performance

4-3. A simple checklist#

When ETFs are often a better fit:

I want control over execution price (limit orders)
timing / liquidity matters
the goal is closer to market/index returns
I want to hold long-term with low fees
I want to combine exposures and rebalance precisely

When mutual funds might fit better:

I want to delegate rebalancing and not think about trading
I want to bet on an active manager’s strategy/skill
ETF liquidity/spread feels like a real cost

5) Example: What is TSLY, and why does it “pay so much”?#

Reference (issuer): YieldMax TSLY

5-1. TSLY is an ETF#

YieldMax TSLA Option Income Strategy ETF (TSLY)
An ETF that strongly emphasizes generating “cash flow (distributions)” via option strategies.

5-2. Why the “dividend/distribution” can look huge#

The key point is that this may not be a traditional corporate dividend.

The source can be option premiums (cash received from strategies like selling calls), not dividends from the underlying company
Distributions can include ROC (Return of Capital)
- Put simply, part of what you receive may be your own capital coming back
- That’s why you might feel like “I’m getting paid a lot” while the ETF price/NAV also trends down
“Yield %” is often calculated as recent distribution / current price
- If price drops, the yield % can look higher (a simple optical illusion)

So for these products, it’s important to think in total return (price change + distributions), not just distributions.

5-3. The intuitive trade-offs#

Sideways / gentle up: option premiums may work in your favor
Sharp up: selling calls can cap upside
Sharp down: premiums may cushion a bit, but losses can still be large

6) Futures vs options: the minimum you need for “options”#

6-1. Futures#

An obligation to buy/sell at a set price on a future date
Long profits if price rises, loses if it falls (short is the opposite)
Margin-based, so leverage can be large

6-2. Options#

A contract to buy/sell at a set price in the future, but as a right, not an obligation
You pay a premium to obtain that right
The option buyer can choose not to exercise
- so the loss is usually limited to the premium

Call vs put#

Call option: the right to buy
Put option: the right to sell

6-3. “Do options include futures?”#

Options and futures are both derivatives, but options are not a subset of futures.
Options can lead to spot/futures positions when exercised (depending on settlement), but it’s not accurate to say “options are just futures in advance.”

7) How a call buyer makes money (a very simplified example)#

This is simplified just for intuition—focus on the shape of the calculation.

7-1. Setup#

Buy the right to purchase TSLA at $200 in one month (a call) for a premium of $10
Buy 10 calls → total premium $100
One month later, TSLA is $250

7-2. Intrinsic value#

At expiration, intrinsic value per call = (250 - 200 = 50)

7-3. Two ways to realize it (economically similar)#

A) Sell the option to close (common)#

Option value (simplified) ≈ $50 each → sell 10 calls → $500 received
Profit ≈ (500 - 100 = 400)

B) Exercise, then sell the stock#

Buy at $200, sell at $250 → stock profit $500
Profit ≈ (500 - 100 = 400)

Note: In US equity options, 1 contract typically represents 100 shares. This example treats “1 option = 1 share” to keep the math intuitive.