7 High-Yield Covered Call ETFs Income Investors Will Love

Many investors may be wary of derivative-based funds and strategies. Compared to regular index funds, they tend to be more complicated, pricier and difficult to understand. However, when employed properly or managed by a competent fund manager, derivative strategies can drastically transform the risk/return profiles of average investments.

A great example? Covered call exchange-traded funds, or ETFs, which take ordinary assets like stocks, bonds and even commodities and turn them into income-generating juggernauts by selling options.

“Covered call writing involves selling call options on stock positions you own,” says Robert Johnson, professor of finance at Creighton University’s Heider College of Business. “Essentially, a covered call writer is forgoing some upside potential in exchange for additional current income.”

By selling call options, the writer agrees to sell the underlying shares at a set price, called the “strike,” in return for a cash premium.

“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. Other factors like the option’s time until expiry and the implied volatility of the underlying asset also play a role in determining the size of options premiums.

As a strategy, covered calls are most suitable for moderately bullish investors seeking above-average current income. “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.

In general, covered call strategies underperform when the underlying asset experiences sustained uptrends. If the underlying asset falls, a covered call strategy can offset losses somewhat through the premium received. However, a covered call strategy can outperform during a flat or choppy sideways market as the options sold expire worthless and the writer continually pockets a premium.

“With a covered call ETF, the stock purchase, portfolio management and call writing decisions are left to a professional” – Robert Johnson, professor at Creighton University’s Heider College of Business.

In particular, high-volatility market conditions like in 2022 tend to be beneficial for covered call strategies. “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.”

Because writing options can be complicated and time-consuming for many investors, an alternative is to buy an ETF that incorporates a covered call strategy. “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.”

Keeping all that in mind, here’s a look at seven of the most popular covered call ETFs trading on the market right now:

Global X Nasdaq 100 Covered Call ETF (QYLD)

One of the largest providers of covered call ETFs is Global X ETFs. In addition to its thematic lineup, Global X offers a suite of covered call ETFs tracking various indexes and sectors, with varying levels of options coverage. One of its most popular ETFs is QYLD, which tracks the tech- and growth stock-heavy Nasdaq-100 index with a covered call overlay.