7 High-Yield Covered Call ETFs Income Investors Will Love

With the three-month Treasury bill, or T-bill, rate hovering at around 5.3% these days, there’s not much incentive for income investors to take unnecessary risks. Even traditional income sources like dividend stocks and real estate investment trusts, or REITs, are paying yields under this rate.

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For instance, the Schwab U.S. Dividend Equity ETF (ticker: SCHD) and the Schwab U.S. REIT ETF (SCHH) both currently pay distribution yields of 3.5%, which is calculated as the most recent dividend payment annualized and divided by the current share price, expressed as a percentage.

If you want higher yields without the risk of credit assets like high-yield junk bonds or the high fees of closed-end funds, there’s another option: selling covered calls.

Suppose you own 100 shares of a stock. You could sell one call option, which represents the right for someone else to buy those 100 shares from you at a predetermined price (the strike price) within a specific period (the expiry date).

When you sell this call, you receive an immediate cash premium. The size of this premium is based on numerous factors, including the option’s moneyness (how close the current stock price is to the strike price), how far away the expiry date is, and the stock’s volatility.

The best-case outcome for you as the covered call seller is if the stock price remains flat, and the call expires worthless, allowing you to keep both the premium and the shares.

But the worst-case scenario isn’t too bad either — if the stock surges past the strike price, you keep the premium but have to sell the stock for less than what it’s worth in the market at the time.

“Essentially, a covered call writer is forgoing some upside potential in exchange for additional current income,” says Robert Johnson, professor of finance at Creighton University’s Heider College of Business.

If this seems difficult, you can outsource the work to covered call ETFs. These ETFs can be more diversified, as most sell covered calls on a diversified portfolio. They are also more capital efficient, as you no longer have to hold 100 shares of each stock in the portfolio. Additionally, they are more hands-off, as the portfolio manager handles the call writing on your behalf.

“With a covered call ETF, the stock purchase, portfolio management and call writing decisions are left to a professional,” Johnson says. “By buying a covered call ETF, one doesn’t have to continuously monitor both the stock and options markets.”

Here are seven of the best covered call ETFs to buy right now:

Covered Call ETF Distribution Yield*
Global X Nasdaq 100 Covered Call ETF (QYLD) 11.9%
Global X Russell 2000 Covered Call ETF (RYLD) 12.4%
Global X S&P 500 Covered Call ETF (XYLD) 9.6%
JPMorgan Equity Premium Income ETF (JEPI) 7.6%
Amplify CWP Enhanced Dividend Income ETF (DIVO) 4.7%
Roundhill N-100 0DTE Covered Call Strategy ETF (QDTE) 30.8%
Roundhill Bitcoin Covered Call Strategy ETF (YBTC) 50.4%

*As of May 31 close.

Global X Nasdaq 100 Covered Call ETF (QYLD)

“Typically, the closer the strike price of the call sold is to the price level of the asset initially, the higher the potential is for a higher premium,” says Chandler Nichols, product specialist at Global X ETFs. This mechanic can be seen at play with QYLD, which sells monthly at-the-money (ATM) calls against the Nasdaq-100 index to track its benchmark, the Cboe Nasdaq-100 BuyWrite V2 Index.

QYLD’s distribution yield currently sits at 11.9%, far higher than the Nasdaq-100, which pays a relatively low yield. However, this can come at the cost of capital appreciation in years when the index is in a bull market, as the use of ATM calls can force the ETF to sell shares below market price. QYLD currently charges a 0.61% expense ratio and also pays monthly distributions.

[READ: How to Recover After a Loss in the Stock Market.]

Global X Russell 2000 Covered Call ETF (RYLD)

“A covered call strategy’s income is derived from options premiums, which are influenced by the implied volatility of the underlying asset,” Nichols says. “Therefore, the higher the implied volatility, the higher the anticipated option premium, all else being equal.” By writing ATM covered calls on the Russell 2000 index, a benchmark for small-cap stocks, RYLD is able to deliver a 12% distribution yield.

This is primarily due to the high volatility of the small-cap stocks found in the Russell 2000. By harnessing this volatility, RYLD is able to deliver income far exceeding the dividend yield of this benchmark. As with QYLD, RYLD also pays monthly distributions, and has done so for five years running. It charges a 0.6% net expense ratio and is quite diversified with over 1,900 holdings.

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

“Because writing call options on an existing long position in an underlying asset forfeits a level of upside potential, there are certain market environments where we’d expect covered call strategies to outperform and underperform,” Nichols says. Generally speaking, covered call funds underperform in bull markets, and can outperform in bear or flat markets when their premiums can boost returns.

This dynamic can be seen with XYLD’s past performance, which sells ATM monthly covered calls against the S&P 500. In 2022’s bear market, XYLD fell 12.1% compared to the 18.2% loss suffered by the SPDR S&P 500 ETF (SPY). But in 2023’s bull market, XYLD only returned 11.1% total versus 26.2% for SPY. This ETF currently pays a 9.6% distribution yield and charges a 0.6% expense ratio.

JPMorgan Equity Premium Income ETF (JEPI)

JEPI also utilizes an S&P 500 covered call strategy, but sells options out of the money, or OTM. This results in lower premiums but retains a greater degree of upside appreciation potential. Further, JEPI departs from XYLD by actively picking stocks from the S&P 500 index selected for lower volatility. That is, the ETF does not attempt to physically hold all of the S&P 500 stocks as represented in the index.

Despite not holding all the S&P 500 stocks, JEPI is still able to utilize a covered call strategy via equity-linked notes (ELNs). These are derivatives that provide the ETF with the risk and return of a covered call strategy. This approach is capital-efficient but adds a degree of counterparty risk. Currently, investors can expect a 7.5% yield from JEPI and a very reasonable 0.35% expense ratio.

Amplify CWP Enhanced Dividend Income ETF (DIVO)

DIVO’s 4.7% distribution rate isn’t the highest on this list, but don’t let that fool you. This ETF is one of the top funds in Morningstar’s derivative income category, having earned a five-star rating due to its historical outperformance over peers. Unlike the previous ETFs, DIVO’s managers actively pick a concentrated portfolio of quality dividend companies, and then sell covered calls on individual stocks.

“Unlike most index-based covered call ETFs that write calls robotically at set times, DIVO’s actively managed approach not only allows the manager to monitor holdings each day to ensure they meet quality and valuation metrics, but it also provides the flexibility to take advantage of timely opportunities by writing calls on individual stocks,” says Christian Magoon, CEO of Amplify ETFs.

Roundhill N-100 0DTE Covered Call Strategy ETF (QDTE)

“What makes QDTE unique is that the ETF is the first to sell zero days to expiry (0DTE) options on the Nasdaq-100, which are subject to structural market mispricing that offer high option premiums,” says Dave Mazza, CEO at Roundhill Investments. Whereas most covered call ETFs sell options with a month until expiry, QDTE is able to harvest premiums on a daily basis, resulting in potentially higher yields.

“QDTE, along with its sister, the S&P 500 0DTE Covered Call Strategy ETF (XDTE) are also the only ETFs that seek to pay weekly distributions,” Mazza says. Currently, investors can expect a very high 30.8% distribution yield, but should be wary of high volatility and a 0.95% expense ratio. Keep in mind that the yield is not guaranteed, and capital loss is possible with this and all covered call ETFs.

Roundhill Bitcoin Covered Call Strategy ETF (YBTC)

The approval of 11 spot Bitcoin ETFs on Jan. 11 opened the floodgates for a variety of new ETF strategies, with YBTC debuting a week later on Jan. 18 as the first U.S.-listed Bitcoin covered call ETF. “YBTC seeks to generate high levels of income through a covered call strategy on Bitcoin ETFs, which has historically offered significant option premiums thanks to its high volatility,” Mazza says.

For investors looking for Bitcoin exposure, albeit with a focus on yield instead of capital appreciation, YBTC could be ideal. Although highly volatile due to the nature of its underlying holdings, the ETF is currently paying a very high 50.3% distribution yield. However, remember that this could come at the cost of some lost upside potential if Bitcoin surges again. YBTC charges a 0.95% expense ratio.

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

Update 06/03/24: This story was previously published at an earlier date and has been updated with new information.

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