Covered call exchange-traded funds (ETFs) trade upside price appreciation for above-average income, often yielding far more than traditional dividend ETFs.
Their appeal became especially clear after the 2022 bear market, when elevated volatility boosted payouts and helped these funds outperform broader equity benchmarks.
But this isn't a free lunch. Covered call ETFs come with higher fees, trade-offs, and added complexity, so it's worth understanding how they work before investing.
Best covered call ETFs to consider
Not all covered call ETFs are built the same. Some follow strict indexes; others are actively managed. Some prioritize income above all else; others try to balance yield with growth potential. For each fund below, we cover historical performance, yield, expense ratio, and what makes it worth considering.
ETF Name and Ticker | Expense Ratio | Distribution Yield |
Global X S&P 500 Covered Call ETF (XYLD) | 0.60% | 11.90% |
Global X Nasdaq 100 Covered Call ETF (QYLD) | 0.60% | 11.86% |
JPMorgan Equity Premium Income ETF (JEPI) | 0.35% | 7.29% |
JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) | 0.35% | 10.80% |
NEOS S&P 500 High Income ETF (SPYI) | 0.68% | 12.24% |
NEOS Nasdaq-100® High Income ETF (QQQI) | 0.68% | 14.32% |
Amplify CWP Enhanced Dividend Income ETF (DIVO) | 0.56% | 4.79% |
1. Global X S&P 500 Covered Call ETF
The Global X S&P 500 Covered Call ETF (XYLD +0.31%) tracks the CBOE S&P 500 BuyWrite index and holds all the stocks in the S&P 500. The 0.60% expense ratio is about average for a fund in this category.
NYSEMKT: XYLD
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NASDAQ: QYLD
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NYSEMKT: JEPI
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It starts with a portfolio of defensive, low-volatility stocks, aiming to reduce downside risk. But it doesn't write covered calls directly on these stocks. Instead, it allocates about 15% of its portfolio to equity-linked notes (ELNs), which are custom over-the-counter structured products that mimic the return profile of one-month out-of-the-money (OTM) covered calls on the S&P 500.
This approach allows this ETF to collect options premiums while preserving some upside, which helps explain its stronger total returns. Over the last five years, it delivered a 8.38% annualized return.
NASDAQ: JEPQ
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NYSEMKT: SPYI
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Like the NEOS S&P 500 High Income ETF, a meaningful portion of those distributions is classified as a return of capital, which can help defer taxes by reducing cost basis rather than triggering immediate income tax.
The fund charges a 0.68% expense ratio, and although it's newer -- launched on Jan. 30, 2024 -- it's already showing strong results. Since its inception, it has delivered an annualized return of 15.05%, outperforming the CBOE Nasdaq-100 BuyWrite Monthly Index, which returned 12.74% over the same period.
NYSEMKT: DIVO
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The fund's managers screen for companies with strong dividends, consistent earnings and cash flow growth, high return on equity, and a solid management track record, spanning most sectors for diversification. Where this ETF stands out is its flexible options overlay. Instead of selling index calls or writing on the entire portfolio, the fund's managers tactically write call options on individual stocks.
They choose the timing, strike prices, and coverage ratios based on market conditions and stock-specific outlooks. This allows for more control over the balance between income and capital appreciation.
As a result, Amplify CWP Enhanced Dividend Income ETF offers a lower yield but superior long-term total returns. Over the past five years, it has returned 11.07% annualized, outperforming the CBOE S&P 500 BuyWrite Index's 7.92% during the same period.
The expense ratio is 0.56%, which is reasonable for an actively managed covered call ETF with selective stock picking and tactical option execution.
Types of covered call ETFs
Covered call ETFs come in several forms. The easiest way to understand them is to think in pairs of design choices. These are not mutually exclusive. Many ETFs combine multiple approaches as long as they are not directly opposed to one another.
- Index-based versus actively managed: Index-based covered call ETFs follow a transparent, rules-driven process. The option writing schedule, strike selection, and coverage ratio are predefined and mechanical. Actively managed covered call ETFs rely on manager discretion, research, and market views to decide when and how aggressively to sell calls. This introduces manager skill risk but can add flexibility.
- Type of options used: Covered call ETFs may write options on individual stocks, broad-market ETFs, or indexes. Some use swaps tied to option-selling indexes, while others rely on equity-linked notes that embed option exposure. Each method affects transparency, tax treatment, and tracking behavior.
What to look for in a covered call ETF
Start with methodology. Review how calls are written, including moneyness (i.e., in-the-money, at-the-money, or out-of-the-money), strike selection, expiration length, and amount of portfolio coverage.
The underlying holdings also matter. Writing calls on volatile assets generates more income but caps upside more aggressively and can introduce more downside risk.
Fees are the next filter. Covered call ETFs typically charge higher fees than plain-vanilla equity ETFs due to options management and operational complexity. Higher fees reduce net income and long-term returns.
Tax efficiency is often overlooked. Distributions may consist of ordinary income, dividends, capital gains, or return of capital. The mix affects after-tax results and can vary significantly between funds.
Finally, evaluate risk-adjusted returns. Covered call ETFs should lag uncapped benchmarks during strong bull markets. A well-constructed ETF should reduce downside volatility and produce a Sharpe ratio that is comparable to, or better than, the underlying benchmark over time.
Should you buy a covered call ETF?
Reasons to consider:
- Ideal for retirees or income-focused investors who want steady, predictable monthly payouts
- Works best in rangebound or high-volatility markets, where stock prices move sideways and option premiums can be collected repeatedly
- Particularly effective in tax-sheltered accounts, such as a Roth IRA (individual retirement account) or tax-free savings account (TFSA), where distributions aren't taxed
Reasons to be cautious:
- Limited upside: The strategy caps potential gains, causing underperformance in strong bull markets.
- Tax inefficiency: Frequent distributions and option income can increase the tax burden in taxable accounts.
- Not beginner-friendly: Covered call ETFs use derivatives that can behave differently from traditional index funds, making them more complex and harder to use effectively.
- Long-term performance risk: Over time, most covered call ETFs tend to lag traditional index ETFs due to their capped growth and higher costs.
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FAQ
Covered call ETFs FAQ
Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
