7 High-Yield Covered Call ETFs Income Investors Will Love

These top covered call ETFs have high yields.

Income-oriented investors seeking high yields traditionally turn to a mixture of dividend stocks, corporate bonds and preferred shares. However, a better way to maximize yield might be investing in a covered call exchange-traded fund, or ETF. These ETFs sell call options to net a premium. In return, the ETF agrees to sell the underlying shares to the buyer at a set price, called the strike, if the share price rises above it, known as being “in the money,” before expiry. In general, the premium size is determined by three factors: time until expiry, how “out of the money” the strike price is and volatility of the underlying holdings. Covered calls aren’t free money, though, as you’re selling potential upside capital growth for immediate income. However, they may be ideal in a sideways trading market or for investors requiring consistent monthly income. Here are seven covered call ETFs to buy for income investors, all of which yield 5% or more.

Global X Nasdaq 100 Covered Call ETF (ticker: QYLD)

QYLD has a simple strategy: The ETF buys the 100 or so stocks held in the Nasdaq 100 Index and sells call options against all of them. The call options sold are all out-of-the-money — when strike price is above the current price — and dated a month out until expiry. Because the underlying Nasdaq 100 Index has been very volatile in recent years, QLYD’s covered calls net a rather large monthly premium. During bull markets the fund will lag the Nasdaq 100 as the options sold go in-the-money and its shares get called away. But in a high-volatility, sideways-trading market like today’s, the premiums it receives can boost returns. QYLD will cost an expense ratio of 0.6% to hold, which is high but typical for ETFs that use derivatives.

QYLD dividend yield (trailing twelve months, or TTM): 10.6%

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

If the 100 non-financial mega-cap stocks in QYLD aren’t diversified enough for you, consider XYLD instead. Like QYLD, XYLD also sells a covered call overlay against its underlying holdings. The difference is that XYLD instead tracks the S&P 500 index, widely considered a barometer of U.S. stock market performance. As a result, XYLD is significantly more diversified than QYLD, with more holdings in mid-cap and financial sector stocks, and less concentration in the technology sector. The S&P 500 is also less volatile than the Nasdaq 100. As a result, the ETF has a lower 12-month trailing yield, as premiums tend to be lower when the underlying holdings have lower volatility. However, the ETF will fluctuate less than QYLD, which may be desirable to some investors. Like QYLD, buying XYLD will cost an expense ratio of 0.6%.

XYLD dividend yield (TTM): 9.5%

Global X Russell 2000 Covered Call ETF (RYLD)

Remember that for covered calls, a general rule is that the more volatile the underlying holdings are, the larger the premiums received will tend to be. In this case, investors trying to maximize their yield can invest in RYLD, which writes options on the highly volatile Russell 2000 Index. The Russell 2000 tracks the performance of U.S. small-cap stocks, which are generally riskier and more volatile than large caps. The volatility of this ETF is quite high, with a standard deviation of 19.4%. Investors holding RYLD must be comfortable with the value of their investment fluctuating wildly on a weekly or even daily basis. As a result, RYLD is better suited for investors with a high risk tolerance and a bullish outlook for small-cap stocks. The ETF also costs an expense ratio of 0.6%.

RYLD dividend yield (TTM): 11.2%

Global X Nasdaq Covered Call & Growth ETF (QYLG)

If you don’t need 12% or more in yield every year and want to prioritize long-term share appreciation over maximizing present-day income, QYLG might be a better buy compared to QYLD. Unlike QYLD, QYLG only sells options on 50% of its holdings. Therefore, in a bull market, its upside potential is less capped. If the call options sold go in-the-money, QYLG only has to sell 50% of them, allowing it to participate in more upside potential. However, this does mean that the premium received is slightly lower. Still, since January 2021, QYLG has outperformed QYLD even with all distributions reinvested, at a compound annual growth rate, or CAGR, of 13.5% versus 6%. The ETF also costs an expense ratio of 0.6%.

QYLG dividend yield (TTM): 5.2%

Nationwide Nasdaq 100 Risk-Managed Income ETF (NUSI)

One drawback of covered call ETFs is their vulnerability to market corrections. If stocks crash, covered call ETFs will too, with the premium received doing little to offset losses. NUSI aims to mitigate this risk by also buying put options. Put options give buyers the right to sell a stock at a set strike price if the share price drops below it before expiry. The buyer must pay a premium for the option. Put options tend to increase in value during a crash, making them a strong hedge. To finance the put options it buys, NUSI sells out-of-the-money call options and uses the premiums received, with the rest paid out as distributions or reinvested in the ETF. As a result, both upside and downside risk are capped, called a collar strategy, which is used to manage volatility. NUSI costs an expense ratio of 0.68%.

NUSI dividend yield (TTM): 8.7%

BMO Covered Call Canadian Banks ETF (ZWB.TO)

Income-oriented U.S. investors should consider looking north of the border and exchanging some of their dollars for Canadian dollars in order to get into some Canadian covered call ETFs, like ZWB. ZWB writes call options on holdings of Canadian “Big Six” bank stocks. In Canada, the banking sector has been a top performer, beating the market for decades thanks to its oligopolistic nature, high dividend growth rate and stellar earnings. If you want to diversify away from U.S. large-cap tech exposure — which many indexes are now heavy on — ZWB could be a great buy. The call options sold are selected based on their implied volatility to maximize the premium received. The ETF is rebalanced semi-annually to ensure an even allocation between the six bank stocks. ZWB costs an expense ratio of 0.72% to hold.

ZWB dividend yield (TTM): 5.3%

BMO Covered Call Canadian Utilities ETF (ZWU.TO)

Canada’s stock market doesn’t just stop at bank stocks, though. It also comprises an assortment of large-cap, low-beta blue-chip stocks in the utilities, telecommunications and energy sectors. These companies often have strong economic moats, with ample cash flow, high dividends and little competition. These sectors are also somewhat cyclical, which tends to increase their volatility, making the premiums from selling covered calls more lucrative at times. Buying ZWU will grant you access to over 50 of these stocks, giving investors good exposure to Canada’s utilities, telecommunications and energy sectors. A combination of both covered calls and already-high dividend yields in the underlying stocks gives ZWU a decent annualized distribution yield. Like ZWB, ZWU also writes out-of-the-money calls on just 50% of its holdings and is also rebalanced semi-annually. The ETF costs an expense ratio of 0.71%.

ZWU dividend yield (TTM): 7.2%

Top covered call ETFs to buy for high yields:

— Global X Nasdaq 100 Covered Call ETF (ticker: QYLD)

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

— Global X Russell 2000 Covered Call ETF (RYLD)

— Global X Nasdaq Covered Call & Growth ETF (QYLG)

— Nationwide Nasdaq 100 Risk-Managed Income ETF (NUSI)

— BMO Covered Call Canadian Banks ETF (ZWB.TO)

— BMO Covered Call Canadian Utilities ETF (ZWU.TO)

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7 High-Yield Covered Call ETFs Income Investors Will Love originally appeared on usnews.com

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