Income-focused investors have numerous options to generate strong returns today, with government bonds paying over 4.3%. One of the most popular approaches is known as covered call ETFs, which pay substantial payouts to investors. This article explains how these funds work and then identifies some of the best to buy.
What are covered call ETFs?
A covered call ETF is a fund that aims to generate a strong dividend return and a price return of an asset. The fund can track an individual stock or an index.
These funds have two key components. First, they invest in the underlying asset, either directly or through a derivative. Doing that exposes them to the price return when the price rises.
Second, they then write call options on the underlying asset. In this case, the call option gives them the right but not the obligation to sell an asset and pockets the premium.
Most of these funds pay a monthly dividend payout that are higher than other ETFs. They also pay a monthly return for companies that don’t pay a dividend to their investors.
The only caveat is that, in many instances, these ETFs generate a low total return compared to the underlying asset.
Best covered call ETFs to buy
Some of the best covered call ETFs to buy for high returns are: Global X NASDAQ 100 Covered Call ETF (QYLD),
Global X NASDAQ 100 Covered Call ETF (QYLD)
The QYLD ETF is a large fund with over $8.3 billion in assets under management. It has an expense ratio of 0.60% and a dividend yield of 13.6%, and a track record of paying monthly dividends for over 11 years.
The fund achieves these returns by investing at least 80% of the funds in companies in the Cboe-NASDAQ-100 BuyWrite V2 Index. By investing in this index, it automatically implements the covered option strategy since it has a portfolio of stocks in the NASDAQ 100 index and then writes one-month at-the-money call options.
The other popular Nasdaq 100 covered call ETFs to consider are the JPMorgan Nasdaq Equity Premium Income ETF (JEPI and, Global X Nasdaq 100 Covered Call & Growth ETF (QYLG).
Read more: Best high-yielding covered call ETFs for a dividend-rich retirement
Roundhill S&P 500 0DTE Covered Call Strategy ETF (XDTE)
The Roundhill S&P 500 0DTE Covered Call Strategy ETF (XDTE) is a fund that focuses on the zero days to expiration (ODTE) options, which expire on the same day. It has almost $400 million in assets and an expense ratio of 0.97%.
The fund also has a whopping dividend yield of 31%, higher than most ETFs. It does that by seeking an overnight exposure to the S&P 500 Index and then generates income by selling out-of-the-money ODTE calls on the index.
The XDTE ETF is a good one for investors seeking monthly dividends. However, its total return lags behind that of the S&P 500. It had a total return of 10% in the last 12 months compared to VOO’s 14.26%.
Neos S&P 500(R) High Income ETF (SPYI)
The Neos S&P 500(R) High Income ETF is another quality covered call ETF to consider. It has over $3.7 billion in assets, an expense ratio of 0.68%, and a dividend yield of 12%.
This ETF differs from the JPMorgan Premium Equity ETF (JEPI) in that it tracks all companies in the S&P 500 Index. It also offers tax loss harvesting, which makes it one of the best performers.
The other similar funds to consider are Goldman Sachs S&P 500 Premium Income ETF (GPIX), JPMorgan Nasdaq Equity Premium Income ETF (JEPQ), and Roundhill Innovation-100 0DTE Covered Call Strategy ETF (QDTE).
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