The exchange-traded fund (ETF) structure is highly versatile. You might already know that ETFs can hold almost anything – stocks, bonds, crypto, futures and even physical commodities. But one of the fastest-growing corners of the market is options-based ETFs.
These funds use options, which are contracts traded on exchanges that give buyers the right, but not the obligation, to buy or sell an asset at a specific price before a set date. The most popular flavor of options ETFs, especially since the 2022 bear market, are covered-call ETFs.
These funds come in many forms, with different underlying assets and call-selling strategies. But most offer a similar trade-off: higher income yields in exchange for limited capital upside.
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There’s still a lot of nuance under the hood, though, so before you chase headline yields, make sure you understand what you’re really buying.
How do covered-call ETFs work?
It’s easier to understand how covered calls work when you think of them by their alternate name: “buy-write.” The setup involves owning 100 shares of an asset and then selling one call option against those shares.
Selling the call option obligates you to sell your shares at a specific price (the “strike”) if the buyer chooses to exercise the contract. In return, you pocket cash upfront in the form of a premium paid by the buyer.
The amount of premium you collect mostly depends on three things:
- Moneyness: How close the strike price is to the current price of the asset
- Time to expiry: Longer-dated options tend to be worth more
- Underlying asset volatility: More volatility generally means higher premiums
That income adds a cushion in bear markets and can help you outperform when markets move sideways. But it also means your returns could lag in a strong bull market because your upside is capped.
Covered-call ETFs just execute some version of this strategy at scale. They do it for you in exchange for a management fee. But there’s a lot of variation within this niche.
For example, you’ll find covered-call ETFs that only sell calls on individual stocks, while others use broad indexes like the S&P 500 or Nasdaq-100. Some stick to one-month expiries, while others write so-called 0DTE (zero days to expiry) options.
Some funds write calls on 100% of the portfolio to maximize income, while others sell on just a portion to preserve some upside.
Other strategies include selling at-the-money (ATM) options for the biggest premiums but zero upside or using out-of-the-money (OTM) strikes to allow a bit of capital growth.
These approaches aren’t mutually exclusive, either. There’s almost an endless mix of assets, strike selection, expiries and coverage ratios.
But remember, there’s no free lunch here. Covered-call ETFs are just another way to realize returns. They’re better suited for investors who value income over price appreciation and who can manage or tolerate the tax drag that often comes with it.
How we chose the best covered-call ETFs to buy
We started by screening out ETFs using a synthetic buy-write setup, like pairing a long call with a short put instead of holding the underlying stocks outright. These synthetic structures can introduce counterparty risk and execution complexity.
We excluded covered-call ETFs that only track individual stocks. These products lack diversification and don’t offer the broader market exposure many income-focused investors want in a core position.
We gave added weight to covered-call ETFs that delivered attractive risk-adjusted returns compared to traditional index ETFs.
Since covered-call strategies typically sacrifice upside for income, we prioritized funds that proved they could still hold their own in choppy markets where this approach tends to shine.
Then we applied our standard filters. We capped fees at 0.7% to ensure cost efficiency and focused on reputability, favoring ETFs with at least $1 billion in assets under management and those backed by experienced options-focused firms or large, established asset managers.
JPMorgan Equity Premium Income ETF
- Assets under management: $39.8 billion
- Expense ratio: 0.35%
- Dividend yield: 8.1%
The JPMorgan Equity Premium Income ETF (JEPI) actively selects a portfolio of defensive, low-volatility U.S. equities.
It then sells out-of-the-money S&P 500 call options using equity-linked notes (ELNs), which are structured instruments that combine a bond with an embedded option. This setup gives investors the potential for index-level option premiums while holding a lower-volatility stock basket.
JEPI has historically delivered strong risk-adjusted returns, though it’s worth noting that distributions from ELNs are taxed as ordinary income, which may reduce tax efficiency for some investors.
Learn more about JEPI at the JPMorgan provider site.
JPMorgan Nasdaq Equity Premium Income ETF
- Assets under management: $26.4 billion
- Expense ratio: 0.35%
- Dividend yield: 11.4%
The JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) is the more aggressive counterpart to JEPI, offering exposure to a portfolio that closely mirrors the Nasdaq-100, with a heavy tilt toward the Magnificent Seven stocks.
Like JEPI, it uses ELNs to sell out-of-the-money call options on the index. Because the Nasdaq is typically more volatile, JEPQ has historically delivered higher levels of income.
It shares the same expense ratio as JEPI and faces similar tax efficiency challenges, with distributions from ELNs taxed as ordinary income.
Learn more about JEPQ at the JPMorgan provider site.
NEOS S&P 500 High Income ETF
- Assets under management: $3.7 billion
- Expense ratio: 0.68%
- Dividend yield: 12.5%
The NEOS S&P 500 High Income ETF (SPYI) fully replicates the S&P 500 by holding the individual stocks in the index. It then opportunistically sells call options on the S&P 500 Index (SPX) using a data-driven overlay strategy.
A key benefit of SPYI is its tax efficiency. The SPX options it sells are classified as Section 1256 contracts, which are taxed at a blended 60/40 rate – 60% long-term and 40% short-term capital gains.
On top of that, the fund actively tax-loss harvests, using losses to offset gains. This strategy can increase the portion of distributions classified as return of capital (RoC), which is not taxed in the year received and instead lowers the investor’s cost basis.
Learn more about SPYI at the NEOS provider site.
NEOS Nasdaq 100 High Income ETF
- Assets under management: $1.8 billion
- Expense ratio: 0.68%
- Dividend yield: 14.5%
The NEOS Nasdaq 100 High Income ETF (QQQI) mirrors the strategy used by SPYI. It holds all the individual stocks in the Nasdaq-100 and Nasdaq-100 Index (NDX) call options.
As with SPYI, these options are taxed under Section 1256 and the fund actively tax-loss harvests, helping boost the portion of distributions classified as RoC.
QQQI’s yield is notably higher, thanks to the higher volatility of the Nasdaq-100. More volatility means richer option premiums, similar to how JEPQ compares to JEPI.
Learn more about QQQI at the NEOS provider site.
Amplify CWP Enhanced Dividend Income ETF
- Assets under management: $4.3 billion
- Expense ratio: 0.56%
- Dividend yield: 4.8%
The Amplify CWP Enhanced Dividend Income ETF (DIVO) is a highly active covered-call fund that has earned a 5-star Morningstar rating, placing it among the top performers in the large-cap value category.
The fund starts with a concentrated portfolio of 20 to 25 blue chip stocks, screened for strong fundamentals like earnings and dividend growth, management quality, cash flow, and return on equity.
DIVO then selectively sells call options on individual stocks in the portfolio based on factors like volatility and earnings momentum.
It actively manages coverage ratios, strike prices and expiry dates, which gives it more flexibility to capture upside.
While its yield is lower than many index-based covered-call ETFs, DIVO has historically delivered strong total returns.
Learn more about DIVO at the Amplify provider site.
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