With
tantalizing
yields
that
can
reach
10%
or
more,
covered-call
exchange-traded
funds
have
become
a
popular
investment.
The
products
essentially
invest
in
stocks
and
then
sell
call
options
on
all
or
a
portion
of
the
portfolio.
The
result
is
income
for
investors,
based
on
the
option’s
premium,
in
return
for
capped
upside
if
the
option
is
exercised.
“That
payout
is
not
for
free,”
said
Morningstar
manager
research
analyst
Lan
Anh
Tran.
“The
payout
was
coming
at
the
cost
of
your
upside.”
That
can
be
particularly
costly
during
a
market
rally.
The
funds
should
outperform
when
the
market
is
flat
or
down,
and
investors
collect
the
premium
and
the
stocks
don’t
get
called
away.
That’s
what
happened
in
2022,
when
the
S
&
P
500
lost
nearly
13%,
Tran
said.
“Obviously,
in
a
market
like
2023,
or
like
the
first
half
of
2024,
when
the
…
broader
stock
market
has
just
been
going
up,
these
are
going
to
lag
the
market,”
she
said.
The
S
&
P
500
has
gained
18%
so
far
this
year,
while
the
Nasdaq
Composite
has
rallied
23%.
Still,
the
ETFs
remain
popular.
The
derivative
income
Morningstar
category,
dominated
by
covered-call
ETFs,
saw
inflows
of
$24.3
billion
over
the
past
year,
as
of
June.
Total
assets
under
management
now
stand
at
$90.6
billion.
The
largest
actively
managed,
covered-call
ETF
is
the
JPMorgan
Equity
Premium
Income
ETF
,
which
has
a
6.88%
30-day
yield
and
an
adjusted
expense
ratio
of
0.35%.
It
is
up
6.64%
year
to
date.
JEPI
has
seen
nearly
$4.9
billion
in
inflows
over
the
past
year,
according
to
FactSet.
Its
assets
under
management
now
stand
at
about
$34
billion.
JEPI
1Y
mountain
JEPI’s
one-year
performance
Global
X
also
has
a
series
of
passively
managed
funds
that
track
various
indexes.
For
instance,
the
Global
X
Nasdaq-100
Covered
Call
ETF
(QYLD)
has
more
than
$8
billion
in
assets
and
is
up
3.5%
year
to
date.
Its
S
&
P
500
Covered
Call
ETF
(XYLD)
has
nearly
$3
billion
in
assets
and
is
ahead
nearly
4%.
Global
X
writes
index
call
options
on
the
third
Friday
of
every
month,
said
Rohan
Reddy,
the
firm’s
director
of
research.
In
some
cases,
it’s
on
50%
of
the
portfolio,
in
other
cases
it
is
on
the
entire
portfolio.
The
annual
distribution
yield
can
reach
double
digits.
QYLD’s
yield
is
currently
11.09%,
while
XYLD’s
is
7.97%,
as
of
Thursday.
Both
have
total
expense
ratios
around
0.6%.
Both
ETFs
have
seen
inflows
this
year,
although
they
have
slowed
as
the
market
has
moved
higher,
Reddy
said.
QYLD
has
seen
about
$154
million
in
inflows
over
the
past
year,
while
XYLD
had
$40
million
over
that
time,
according
to
FactSet.
QYLD
1Y
mountain
Global
X
Nasdaq
100
Covered
Call
ETF
one-year
performance
“Admittedly,
an
environment
like
this,
where
volatility
is
low
and
markets
are
moving
higher,
[it’s]
probably
not
the
most
ideal”
time
for
these
funds,
Reddy
said.
“That
being
said,
most
of
the
investors
who
are
either
evaluating
our
funds
or
continuing
to
remain
in
our
funds,
they
prioritize
more
of
the
income
as
opposed
to
anything
else.”
Another
thing
to
bear
in
mind
is
that
the
market
may
become
more
volatile
as
the
presidential
election
nears,
said
Rick
Wedell,
president
and
chief
investment
officer
at
RFG
Advisory.
While
he
doesn’t
recommend
trying
to
time
the
market,
buying
and
holding
covered-call
ETFs
could
be
a
strategy
for
a
client
asking
for
ideas
to
take
advantage
of
a
potential
downturn
ahead.
“It’s
not
going
to
shield
you
from
100%
of
your
losses,”
he
said.
“But
it
is
a
way
to
say,
let’s
…
maybe
put
a
little
bit
of
a
cap
on
our
upside
but
in
exchange
we
will
outperform
if
the
market
starts
to
slip
a
little
bit.”
What
investors
should
look
for
Investors
should
first
understand
the
underlying
securities
within
the
ETF,
whether
it
is
an
index-based
fund
or
a
portfolio
of
stocks,
Wedell
advised.
“Do
I
want
large-cap
exposure?
Do
I
want
small-cap
exposure?
Do
I
want
international
exposure?”
he
said.
“All
of
that
type
of
stuff
is
important
to
consider.”
Investors
should
also
be
aware
of
the
strategy
being
used
by
the
fund
managers,
which
will
affect
the
upside
potential
and
call
premium.
Deep-in-the-money
or
at-the-money
calls
will
result
in
higher
premiums
but
you
may
give
up
most
of
the
capital
appreciation
potential,
Global
X’s
Reddy
explained.
XYLD
1Y
mountain
Global
X
S
&
P
500
Covered
Call
ETF’s
one-year
performance
Out-of-the-money
calls
deliver
a
lower
dividend
yield
but
you
may
retain
more
upside,
he
explained.
The
most
popular
funds
are
writing
at-the-money
and
slightly
out-of-the-money
covered
calls,
he
noted.
Wedell
doesn’t
think
going
for
the
highest
yield
is
necessarily
the
best
option.
“My
favorite
sweet
spot
of
the
money
is
to
use
things
that
maybe
have
a
little
bit
lower
dividend
yield,”
he
said.
“We
run
into
less
of
that
problem
around
like,
‘Oh,
shoot,
what
happens
if
the
market
runs
by
35%
and
I’m
capped,'”
he
added.
“I
like
those
because
you’re
still
getting
a
nice
high
dividend
payout
for
the
investors
that
care
about
that,
but
you’re
getting
less
of
an
upside
cap.”
Then
there
are
the
fees
to
consider,
which
can
also
eat
away
at
returns.
“You
can
buy
the
SPY
[SPDR
S
&
P
500
ETF
Trust]
for
a
couple
of
basis
points.
And
for
some
of
these
more
esoteric
style
strategies,
you’re
starting
to
talk
about
extreme
expense
ratios
that
are
in
the
60s,
maybe
even
higher,”
Wedell
said,
referring
to
the
number
of
basis
points
a
fund
charges.
One
basis
point
equals
one-hundredth
of
a
percentage
point.
“It’s
real
hard
over
time
to
generate
a
lot
of
alpha
within
that
strategy
to
be
able
to
make
up
that
gap,”
Wedell
noted.
Those
using
covered-call
ETFs
as
a
long-term
strategy
should
choose
funds
that
have
a
low
enough
expense
ratio
where
the
gap
doesn’t
override
the
return,
he
advised.
In
addition,
keep
in
mind
that
because
funds
can
be
constructed
differently,
it
is
hard
to
compare
yields
as
might
be
done
when
looking
at
standard
funds.
“I
don’t
think
currently
there’s
really
a
good
one
single
metric,
unfortunately,
to
be
able
to
kind
of
holistically
just
have
one
number
and
compare
across
all
the
funds,”
said
Morningstar’s
Tran.
It
has
to
do
with
how
the
funds
are
classified
for
tax
purposes,
she
said.
For
instance,
JEPI
is
structured
so
that
everything
is
paid
out
as
interest
income,
which
is
typically
taxed
at
the
same
rate
as
ordinary
income.
Other
funds
may
be
subject
to
capital
gains
taxes,
usually
lower
than
ordinary
income
tax
rates,
she
said.
Since
the
tax
treatment
can
be
tricky,
experts
suggest
consulting
a
tax
professional.
In
the
end,
investors
should
consider
if
they
want
to
add
the
strategy
as
part
of
their
overall
portfolio
to
bring
in
some
income,
or
if
they
are
better
off
sticking
to
their
standard
balanced
portfolio
of
equities
and
fixed
income,
Tran
said.
She
suggests
looking
at
track
records
to
compare
possible
alternatives.
For
instance,
the
Cboe
has
an
index
that
tracks
selling
at-the-money
calls
,
as
well
as
one
that
tracks
selling
out-of-the-money
calls
,
she
said.
“As
with
any
other
investment
product,
you
have
to
understand
what
you’re
giving
up
for
what
does
seem
at
certain
times
to
be
too
good
to
be
true,”
Tran
said.
