Weekly income investments are here: how do they work and who are they for?

A new breed of weekly income investment options have hit the UK market, in a departure from the traditional quarterly or bi-annual dividends that investors usually encounter.

HANetf has launched the Weekly World Equity Income UCITS ETF, which has the ticker WEEK, and it aims to make weekly distributions. Meanwhile, The Smarter Web Company has introduced MORE, a preferred share class paying a weekly dividend.

That might sound particularly attractive for investors who use their portfolios to supplement their regular income.

The more monthly, staggered ones are stalwarts of income investor portfolios, who may be looking for a regular source of income in retirement or using them to pay our gas and electric bills. But the weekly ones may appeal to those looking to help pay for their weekly food shop or refilling the car.

Getting paid more frequently does not automatically mean getting more income overall. An investment paying £520 once a year, for example, has paid out the same as one paying £10 a week for 52 weeks.

And although this ETF and share class both make weekly payments, they are very different investments with very different risks.

Why don't most funds pay weekly?

The reason most funds don't offer a weekly dividend is because most companies pay dividends either quarterly, twice a year or annually. A conventional income fund collects dividend payments from the various companies it owns and then distributes this income to investors according to its own payment schedule, which again can be annual, twice a year, quarterly or sometimes monthly. The Vanguard FTSE All-World High Dividend Yield UCITS ETF, for example, makes quarterly distributions.

Moving to weekly payments requires a different approach and for the HANetf option, part of the answer is something called a covered-call strategy.

The ETF (exchange traded fund) invests in global equities, including growth companies such as Apple, Nvidia and Microsoft. Alongside its shares portfolio, it uses options to generate additional income, which is where the carry-call method comes in.

It's a tad more complex than the usual income investment strategies as it involves an investor selling a call option on a stock they already own to earn extra income.

Several established funds and ETFs use this approach including JP Morgan's £2.8 billion Nasdaq Equity Premium Income Active UCITS ETF and its £1.1 billion Global Equity Premium Income Active UCITS ETF.

By selling call options, the fund generates additional income sooner than if it was having to wait for all its holdings’ dividends to come through. HANetf can use this additional income to fund its weekly dividend. However, there is a trade off in sacrificing some of the future gains if stock markets perform strongly.

Let's say the ETF buys a share at £100, and it sells an option on that stock which gives Buyer A the right to buy the share in a month’s time at £110. In exchange, the fund gets a £2 fee for selling the option, which is used for the income. Cut to a month’s time and if the stock is below £110, the option expires, and the fund keeps everything. But if the price has gone above £110, to say £120, Buyer X gets to keep all that extra upside.

In contrast to a non cover-call fund, like the aforementioned Vanguard high yield fund, it would simply keep all the returns.

That is the central trade-off with covered-call investing: it can produce additional income, but investors can give up some potential returns when markets rise strongly.

The other is a very different proposition

Although the Smarter Web option also pays weekly, investors shouldn't confuse it with the HANetf fund.

For starters, it’s not an ETF, it’s an income-focused, preferred share class issued by The Smarter Web Company.

Smarter Web started out as a web design and online marketing business and has subsequently adopted a strategy combining its operating business with a Bitcoin treasury. Bitcoin itself doesn't pay a dividend or interest though, so the weekly dividend isn't income being produced by the company's crypto holdings.

Instead, the dividend is a financial commitment of The Smarter Web Company. The preferred shares have a cumulative, variable-rate dividend paid weekly, which was initially set at an annual rate of 12% on a £100 reference amount. The money raised through these preference shares can support Bitcoin purchases, business growth and cash reserves.

That gives investors a very different set of risks from owning a diversified global equity ETF. Specifically, their investment is linked to a single issuing company whose wider strategy includes exposure to the highly volatile Bitcoin market.

An 8% yield doesn't mean 8% every week

Both these assets offer an eye-catching yield, which is perhaps the easiest part of weekly-paying investments to misunderstand.

The ETF has shown an annualised distribution rate of around 8%, while Smarter Web’s offer was launched with a 12% annual dividend rate. But these figures do not mean an investor is being paid 8% or 12% every week.

The percentages are annual figures, with the income broken into smaller weekly payments.

Weekly World Equity Income ETF’s distribution is also variable, so its weekly payments can rise or fall depending on the income available from its investment strategy. Its annualised rate shouldn't therefore be confused with something like a fixed savings interest rate.

Since it launched a few weeks ago, it’s already moved around from $0.0153 to $0.0191.

The 12% yield available on Smarter Web Company’s preference shares is also described as variable, meaning investors shouldn’t assume this is a fixed yield.

Investors also need to consider dealing and platform charges, tax where applicable and, for overseas investments, the effect of currency movements. Weekly World Equity Income is denominated in US dollars, so the sterling value of distributions can also be affected by exchange rates and on most investment platforms including AJ Bell you will pay an FX fee on the dividend.

Should investors prioritise being paid weekly?

Weekly income could be useful to some investors who like receiving frequent cash payments, particularly those drawing an income from their portfolio.

But frequency shouldn't be confused with either generosity or safety.

What ultimately matters is how the income is generated, whether it is sustainable, the risks investors must take to receive it and the total return they get from their investment.

Both these options might both pay investors every week, but underneath that eye-catching feature are two very distinct investments.