It seems as if you’re always forced to compromise in picking income investments – you want high yields, but you also want to avoid risk. Maintaining low fees as part of your investment strategy is also a concern.
There are few options available that check all these boxes, but there is one that offers a good balance: covered calls. We have an entire guide on selling covered calls discussing the pros and cons of this approach along with tips on executing the strategy successfully.
However, maybe you’re looking for a more hands-off method to harness the power of covered calls. You’re in luck. We’re going to introduce you to the concept of covered call ETFs, which allow you to leave all the heavy lifting to an expert managing the fund. You can simply reap the fruits of their labor.
That being said, choosing the best ETF to sell covered calls is essential for maximizing upside potential. We’ve compiled the best covered call ETF list in 2024, which features these 5 picks:
Learn more about each one below along with tips on executing covered calls ETF strategies with the help of VectorVest, the #1 stock analysis software you have at your disposal!
What is a Covered Call ETF?
Before we get into choosing the best covered call ETFs, let’s take a step back and explain what these investment vehicles are in the first place.
Overview of Covered Calls
So, what is a covered call? This is a unique options strategy in which you can stake your existing position to earn premium income while still benefiting from some level of stock appreciation.
You own 100 shares of a stock and write call options on it, hoping for minimal price appreciation before the option’s expiration date. At that point, you’d pocket the premium and keep your shares. You can rinse and repeat the strategy over and over again.
If your stock falls in value, the premium earned would offset some of the loss. If the stock skyrockets in value, you’d still earn premium and benefit from the appreciation up to the options strike price – but because the holder of the contract would exercise their option, you’d miss out on additional gains after that point.
Overview of ETFs
Exchange-traded funds (ETFs) are investment funds traded on stock exchanges, similar to stocks. They hold assets such as stocks, commodities, or bonds and generally operate with an arbitrage mechanism designed to keep trading close to its net asset value.
ETFs offer investors diversification, liquidity, and low fees. They are designed to track the performance of a specific index, sector, commodity, or other assets. In other words, they are a great way to let someone manage your portfolio at a more affordable price point than you’d pay a financial advisor.
The only downside is exposure to underperformers within the fund. Because you’re not able to control the specific stocks within the ETF, you may find yourself feeling like you’re giving up control.
How Do Covered Call ETFs Work?
Now, let’s put ETFs and covered calls together. How do covered call ETFS work? These ETFs hold a diversified portfolio of stocks and simultaneously sell call options on those stocks.
The premiums earned from selling the call options are distributed to the ETF holders as income, often on a monthly basis. This, coupled with the income generated from underlying stock appreciation, is what makes up the “yield” you’ll earn through an ETF.
Pros and Cons of Covered Call ETFs
There are so many different stock investment strategies, and even within the options trading realm, there are a variety of methods you can use. So are covered call ETFs right for you? Let’s look at the upside and downside below.
Benefits of Covered Calls ETF
One of the main advantages of covered call ETFs is the potential for enhanced income. This type of ETF often produces higher yields than traditional ETFs, making them attractive for income-focused investors. This is because you’re not just benefiting from stock appreciation but premium income.
As far as risk management options trading goes, these ETFs are inherently safe. The premiums collected from selling call options can provide a buffer against losses in the underlying stock portfolio. The worst-case scenario is that a stock skyrockets and you miss out on additional gains, so you’re really only dealing with opportunity cost.
These funds tend to be well diversified too, spreading risk across various sectors and industries. This can reduce the impact of poor performance from any single stock within the ETF.
Perhaps the biggest benefit of investing in a covered calls ETF is how hands-off it can be. These are managed by professionals who implement the covered call strategy, you just collect the distributions. Whether you don’t have time or expertise in selling options, this is appealing.
There are even tax benefits at play. So, how are options taxed through a covered call ETF strategy? Oftentimes your returns are taxed at lower capital gains rates, which in turn enhances your after-tax profits.
Are Covered Call ETFs Safe, Though?
There are clear benefits of trading stock options through this strategy – but you also have to be aware of why covered calls are bad in some cases. So, are covered call ETFs safe? Yes – they’re one of the safer investments you have at your disposal, as a matter of fact.
That doesn’t mean there is no downside to be aware of, though. If the underlying stocks in the ETF experience significant price appreciation, the gains may be capped because the ETF has sold call options on those stocks. You may miss out on higher returns.
There will always be the concern of market fluctuations as well. If the market experiences a severe downturn, the underlying stocks in the ETF can lose value, and the premiums from selling call options may not be sufficient to offset these losses.
That being said, the loss mitigation associated with selling covered calls will protect your portfolio in a way that other strategies cannot.
You also need to be aware of the dividend policies of the stocks within the ETF. The overall yield can be adversely affected should the underlying stocks reduce or suspend dividends.
Premium decay is another concept you’ll have to understand before diving into this strategy. If the volatility of the underlying stocks decreases, the premiums collected may also decrease, reducing the income generated by the ETF.
Still, selling covered calls is a great method to earn supplemental income without exposing yourself to unnecessary risk. The key to mitigating these downsides is picking the best ETF to sell covered calls. So, let’s get into the best covered call ETF list below!
What is the Best ETF to Sell Covered Calls? Best Covered Call ETF List in 2024
There are so many covered calls ETF options you can choose from, and you could even consider taking a more hands-on approach through our list of the best stocks for covered calls 2024.
But if you want to keep things simple and earn consistent yields without much work, these are the five best covered call ETFs right now.
QYLD
QYLD, or the Global X Nasdaq 100 Covered Call ETF, is the largest covered call ETF. It provides a high yield by selling at-the-money (ATM) call options on the Nasdaq-100 index.
It aims to generate monthly income, making it suitable for investors seeking regular payouts with a nearly 12% dividend yield. However, its downside is the potential missed capital appreciation during bull runs in the Nasdaq-100.
Nevertheless, this ETF has a 0.61% expense ratio and pays monthly distributions, offering a balanced approach for those prioritizing consistent income over growth.
JEPI
The JPMorgan Equity Premium Income ETF (JEPI) utilizes a covered call strategy with a twist. It sells out-of-the-money (OTM) options on the S&P 500 to capture some level of upside potential while still generating income.
The fund favors low-volatility stocks from the S&P 500 rather than holding the entire index. This reduces risk but introduces some counterparty risk through equity-linked notes (ELNs). Still, it’s an excellent choice with a 7.6% yield and a modest 0.35% expense ratio.
QDTE
The Nasdaq-100 Zero Days to Expiry (0DTE) Covered Call ETF (QDTE) is a really unique approach. The fund sells daily 0DTE options to capture premiums, which capitalizes on structural market mispricing and offers potentially higher yields.
The current distribution yield of 30.8% is incredibly enticing – but you need to be aware of the role volatility can play in your investments through this fund. A 0.95% expense ratio makes it a high-risk, high-reward option.
QDTE is also one of the few ETFs paying weekly distributions, too. So if you’re looking for frequent income and willing to stick it out through significant price swings, QDTE may be for you.
RYLD
RYLD, or the Global X Russell 2000 Covered Call ETF, writes ATM covered calls on the Russell 2000 index with a focus on small-cap stocks. The high volatility of these stocks helps generate a 12.4% distribution yield.
The fund has consistently paid monthly distributions over the past five years and maintains a 0.6% net expense ratio. The diversified portfolio consists of over 1,900 holdings, giving you broad exposure to the small-cap sector while generating substantial income.
YBTC
The Roundhill Bitcoin Covered Call Strategy ETF is the USA’s first Bitcoin-covered call ETF, recently launched after the approval in January of 2024. It’s been a smashing success thus far.
The yield of just over 50% is the highest on this list and can be attributed to the high volatility of Bitcoin. While the 0.95% expense ratio is rather high, it’s still an excellent opportunity for anyone seeking income from Bitcoin exposure rather than capital appreciation.
Effortlessly Uncover Covered Call ETF Opportunities and Execute With Precision Using VectorVest!
Each of these covered call ETF opportunities has its place, and we’re confident at least one of them will align with your goals. But just as we discussed in our similar guide to the best ETFs for swing trading, you need to be a bit more proactive in managing your investments.
This way you can protect yourself from unnecessary downside exposure associated with poor performers within a fund. This doesn’t mean you have to spend more time stuck in front of your screen analyzing opportunities, though.
You can rely on the best stock analysis app to deliver clear, actionable insights at a glance, helping you earn higher returns with less work. VectorVest is a proprietary stock rating system that has outperformed the S&P 500 index by 10x over the past 20 years and counting. It tells you what to buy, when to buy it, and when to sell it.
With the best stock picker you can even analyze specific ETFs, including all of the options we discussed above and then some. Or, you can use it to write your own covered calls to gain more control over your investment strategy.
When paired with OptionsPro, you can tip the scale in your favor by not only choosing the ideal stock but configuring expiry dates and strike prices to get the best value in premium income – without taking on any additional risk.
If you’re wondering how to make money with options, you need VectorVest in your arsenal. It sets you up for success whether you’re trading a call vs put and can be helpful in building a stock portfolio, too.
See it in action today with a free stock analysis and discover firsthand why it’s the #1 investment app for beginner investors and seasoned traders alike!
Parting Thoughts on the Top Covered Call ETFs
There you have it, everything you need to know about the best covered call ETFs. These funds present a unique opportunity to leverage a covered call strategy without actually having to do the heavy lifting yourself of analyzing stocks, purchasing 100 shares, and then writing call options on them.
From the consistently high yields of QYLD and RYLD to the innovative strategies of QDTE and YBTC, each caters to different risk appetites and financial goals. We hope you have a more clear understanding of your next steps now.
Our blog has additional resources to help you learn options trading, including IV in options trading, what does it mean to exercise stock options, warrants vs options, trading futures vs options, how do stock options work, swing trading options, how to find good options trades, options open interest, and more.
But at this point, it’s time to give yourself an advantage in trading stock options with the best stock apps for iPhone or the best stock apps for Android. Our stock advisory will save you time and stress while helping you win more trades.
So, what are you waiting for?
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