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Covered Call ETFs: A High-Yield Income Strategy for Investors

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In a quest for higher yields amid increased volatility in the stock market, investors are flocking to ETFs utilizing covered-call strategies, resulting in a notable uptick in fund inflows. Covered-call ETFs have seen a surge of interest lately, attracting investors with the promise of hefty yields alongside a shelter from market turbulence.

These ETFs, by employing options strategies known as writing covered calls, provide exposure to the stock market with lower volatility compared to the overall market.

How Do Covered Call ETFs Work?

A covered call is an investment strategy used to generate income and potentially hedge against downside risk. It involves buying a stock or a basket of stocks and then selling or writing call options on those same assets. These options give the buyer the right, but not the obligation, to purchase the stocks at a predetermined price before a specified date.

If the stocks rise above a specified “strike” price, the fund pays the buyer of the option the difference between the stock price and the strike price. However, if the stock declines or simply stays below the exercise price, the fund keeps the income paid by the option buyer. That premium is passed on to fund holders, which is a big attraction for many investors. Most ETFs write monthly call options and pay out the premium they earn at the end of each month (read: S&P 500 Logs Worst Month of 2023: 5 Stocks Still Up in ETF).

With this process, the ETF portfolio aims to generate additional monthly income from the call option (premiums collected). The income from option premiums can help to offset losses from the underlying stocks, which can potentially result in lower portfolio volatility. This means that covered call strategies might experience smaller price swings compared to a pure equity investment.

The main drawback is that the written call options cap the gains of the ETF. During bullish markets, the ETFs might underperform as the profits from rising stock prices are partially offset by the losses on the call options. As such, the strategy outperforms in neutral to bear markets but underperforms in bull markets in the short term.

Additionally, the fees associated with the management of the covered call strategy, along with the ETF’s expense ratio, could erode the fund's returns, especially if the strategy fails to generate the expected income. Further, the tax treatment of the payouts is another concern. The cash flow sometimes isn’t tax-efficient because part of the income can be taxed at the short-term capital gains rate.

Investors seeking to make a play on the stock market using this strategy have many options available in the space. We have highlighted some of the popular ETFs with rock-solid yields below:

JPMorgan Equity Premium Income ETF (JEPI - Free Report)

JPMorgan Equity Premium Income ETF is an actively managed fund that seeks to provide current income while maintaining prospects for capital appreciation. It generates income through a combination of selling options and investing in U.S. large-cap stocks, seeking to deliver a monthly income stream from associated option premiums and stock dividends. JPMorgan Equity Premium Income ETF has AUM of $29 billion and charges 35 bps in annual fees. The product trades in an average daily volume of 4 million shares and sports an excellent yield of 9.98% (read: 5 ETFs That Pulled in Maximum Assets in the First Nine Months).

Global X Nasdaq 100 Covered Call ETF (QYLD - Free Report)

Global X Nasdaq 100 Covered Call ETF follows a “covered call” or “buy-write” strategy, in which the fund buys the stocks in the Nasdaq 100 Index and “writes” or “sells” corresponding call options on the same index. It seeks to track the Cboe Nasdaq-100 BuyWrite V2 Index. Global X Nasdaq 100 Covered Call ETF has $7.7 billion in AUM and trades in a solid volume of 4.7 million shares a day on average. It charges 60 bps in annual fees from investors and has higher yields of 12.25%.

JPMorgan Nasdaq Equity Premium Income ETF (JEPQ - Free Report)

JPMorgan Nasdaq Equity Premium Income ETF generates income through a combination of selling options and investing in U.S. large-cap growth stocks. It seeks to deliver a significant portion of the returns associated with the Nasdaq 100 Index with less volatility. JPMorgan Nasdaq Equity Premium Income ETF has AUM of $5.6 billion and charges 35 bps in fees per year. It trades in an average daily volume of 2 million shares and has a massive dividend yield of 12.09%.

Global X S&P 500 Covered Call ETF (XYLD)

Global X S&P 500 Covered Call ETF buys stocks in the S&P 500 Index and “writes” or “sells” corresponding call options on the same index. It tracks the Cboe S&P 500 BuyWrite Index, charging 60 bps in fees per year. Global X S&P 500 Covered Call ETF has amassed $2.8 billion in its asset base and trades in a good volume of 466,000 shares. It has a solid yield of 11.45% (read: Time to Bet on Buy-Write ETFs).

Global X Russell 2000 Covered Call ETF (RYLD - Free Report)

Global X Russell 2000 Covered Call ETF buys stocks in the Russell 2000 Index (at times by exposure to the Vanguard Russell 2000 ETF) and “writes” or “sells” corresponding call options on the Russell 2000 Index. It follows the Cboe Russell 2000 BuyWrite Index and charges 60 bps in fees per year. Global X Russell 2000 Covered Call ETF has AUM of $1.5 billion and trades in an average daily volume of 793,000 shares. It has a solid yield of 13.27%.

Amplify CWP Enhanced Dividend Income ETF (DIVO - Free Report)

Amplify CWP Enhanced Dividend Income ETF is an actively managed ETF of high-quality large-cap companies with a history of dividend growth, along with a tactical covered call strategy on individual stocks. It has accumulated $2.9 billion in its asset base and charges 55 bps in fees per year. Amplify CWP Enhanced Dividend Income ETF trades in a good volume of 342,000 shares and has an annual yield of 4.99%.

iShares 20+ Year Treasury Bond BuyWrite Strategy ETF (TLTW - Free Report)

iShares 20+ Year Treasury Bond BuyWrite Strategy ETF seeks to provide enhanced income compared to traditional U.S. Treasury bonds by selling monthly covered call options. It may outperform in periods of rising rates. With AUM of $651.7 million, iShares 20+ Year Treasury Bond BuyWrite Strategy ETF charges 35 bps in annual fees and trades in average daily volume of 516,000 shares. It has a solid yield of 21.56% (read: Inverse Treasury ETFs Surge as Yields Rise).

WisdomTree PutWrite Strategy Fund (PUTW - Free Report)

WisdomTree PutWrite Strategy Fund tracks the Volos US Large Cap Target 2.5% PutWrite Index. On a monthly basis, it sells short two put options on the SPDR S&P 500 ETF Trust (SPY) with different expiration dates. The proceeds of these option sales and other collateral are invested in U.S. 3-Month Treasury Bills. WisdomTree PutWrite Strategy Fund has amassed $86.1 million in its asset base while charging 44 bps in annual fees. The product trades in an average daily volume of 25,000 shares and has a solid yield of 10.27%.

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