Top 5 Covered Call ETFs (2022)

  by Shelley Seagler

Exchange-traded funds (ETFs) have become a popular way for investors to access countless strategies, including covered calls. From smart beta to actively managed funds, there are many different ways for investors to generate an income above and beyond dividends. However, there are also several drawbacks to consider before using ETFs.

Let’s look at the top five covered call ETFs and how you might be able to save money by doing it yourself.

Why Invest in Covered Calls?

Covered calls are a two-part strategy where an investor purchases a stock and sells (writes) covered calls on a share-for-share basis. The income generated from writing the covered call generates a “yield” on the underlying stock above and beyond dividends. The only drawback is that the investor sacrifices upside potential beyond the strike price.

Covered Call ETFs

Covered call option diagram. Source: The Options Bro

Covered calls have become especially popular over the past decade due to persistently low-interest rates. With bonds offering relatively little yield, investors turned to dividend stocks, MLPs, REITs, and covered call strategies to shore up their income. Of these options, covered calls provide the most flexibility in building a robust portfolio.

#1. Global X NASDAQ 100 Covered Call ETF (QYLD)

The Global X NASDAQ 100 Covered Call ETF (QYLD) generates income through covered calls on NASDAQ 100 index components. The fund offers monthly distributions with a compelling 10.14% distribution yield and a modest 0.60% expense ratio. The fund also generated an 8.82% annualized return since its inception above and beyond its distributions.

While NASDAQ stocks have been strong performers over the past few years, the recent downturn in technology stocks could weigh on future performance. For example, Facebook has come under pressure since September 2021 following whistleblower revelations that could lead to adverse government regulation.

#2. Amplify CWP Enhanced Dividend Income ETF (DIVO)

The Amplify CWP Enhanced Dividend Income ETF (DIVO) is an actively managed fund with a portfolio of 20 to 25 high-quality large-cap companies with a history of dividend growth. In addition, the fund employs a tactical covered call strategy on individual stocks to provide a high level of total return on a risk-adjusted basis.

The fund offers monthly distributions at a 5.13% rate with a 0.55% expense ratio. In addition, the fund has had a 13.31% annualized rate of return since its inception in December of 2016. The fund’s portfolio is also relatively diversified among the S&P’s ten sectors, helping to reduce risk and maximize risk-adjusted returns over time.

#3. Global X S&P 500 Covered Call ETF (XYLD)

The Global X S&P 500 Covered Call ETF (XYLD) generates income through covered calls on S&P 500 index components. Like QYLD, the fund has a 0.6% expense ratio and pays monthly distributions with a distribution yield of 8.86%. Meanwhile, its annualized returns since inception were 8.43%, given its index components.

Download Now: The Ultimate Guide to Writing Covered Calls. This e-Book has over 30 pages of content devoted to covered calls.

The S&P 500 index is a preferred index for long-term investors due to its industry diversification. That said, the index contains only the largest companies by market capitalization, which inherently limits exposure to mid-cap and small-cap stocks. The largest companies also make up a large percentage  of the index, such as Apple or Amazon.

#4. Global X Russell 2000 Covered Call ETF (RYLD)

The Global X Russell 2000 Covered Call ETF (RYLD) generates income through covered calls on the Russell 2000 index components. As with QYLD and XYLD, the fund has an expense ratio of 0.6% with monthly distributions. However, its distribution yield of 11.76% and returns of 11.46% since inception are higher than its Global X peers.

The Russell 2000 provides greater diversification than the S&P 500 index and includes many mid-cap and small-cap companies. But, of course, investors have limited exposure to larger companies, like Apple, and may experience greater volatility than the S&P 500 index.

#5. Aptus Collared Income Opportunity ETF (ACIO)

The Aptus Collared Income Opportunity ETF (ACIO) is an actively managed fund that invests in 50 large-cap stocks and pursues additional income by selling covered calls. In addition, the fund purchases long put options on a broad-based market index to minimize downside risk, making it ideal for risk-averse investors seeking income.

The fund has an expense ratio of 0.79% and has a dividend yield of 0.75%. Since its inception in 2019, the fund has generated an annualized return of 9.76%, making it a solid performer on a capital gains basis.

Should You Do It Yourself?

Every fund has expenses that investors pay in the form of an annual fee. For instance, an investor that purchases $10,000 worth of ACIO that appreciates 5% per year will pay $81 in costs during the first year and nearly $1,000 over ten years. However, investors can avoid these fees and achieve greater flexibility by managing their own covered call portfolio.

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Of course, building and maintaining a covered call portfolio can be a challenge. For example, you need to select stocks that optimize for yield while minimizing risks. You also need to know when to roll up or rollout covered call options to manage unexpected price movements. And, these challenges alone can make an ETF seem worth it.

Lattco makes it easy to execute covered call strategies. Source: Snider Advisors

At Snider Advisors, we provide a refined system to build and manage a covered call portfolio. Our free e-courses show you how to select the right stocks and options and handle any situations that may arise. Meanwhile, our Lattco solution provides automated tools to help you manage your portfolio without all of the time and stress.

The Bottom Line

Covered calls are a popular way to generate extra income in your portfolio, and ETFs make it easy to invest in these kinds of strategies. Of course, the downside is that ETFs involve an added expense each year that increases with the amount of capital you have invested in them. A do-it-yourself approach can help avoid these fees and increase returns.

If you’re interested in implementing your own covered call strategies, take our free e-courses to learn more or consider our asset management options for a hands-off alternative to ETFs.

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