The 5 Best Covered Call ETFs of 2023

See top-performing covered call ETFs and check their benefits and risks.

kent
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Research Lead
Reviewed by: etf.com Staff
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Edited by: Mark Nacinovich

Covered-call strategies have worked well in 2023 and can provide enhanced income opportunities for investors seeking income. But this active-management approach isn’t ideal for every investor. 

Take a look at the best covered-call ETFs of 2023, as measured by performance, and consider the complete list of benefits and potential drawbacks before investing in these funds. 

The Benefits of Covered Call ETFs 

Covered-call ETFs, also known as buy-write exchange-traded funds, are funds that combine the benefits of owning a portfolio of stocks with generating income from selling call options on those stocks. Here are some potential benefits of covered-call ETFs: 

  • Income generation: By writing (selling) call options on the stocks in their portfolio, these ETFs receive premiums from the options buyers. This premium income can provide a consistent source of cash flow for investors. It's particularly attractive for income-seeking investors in a low-yield environment. 
  • Reduced volatility: Selling call options on the underlying stocks can help decrease the volatility in a portfolio. If the stocks in the fund’s portfolio experience price fluctuations, the income from selling call options can offset some of the losses, thereby reducing the overall portfolio's volatility. 
  • Potential for outperformance: While covered-call strategies may limit the upside potential of the stocks in the portfolio, they can outperform in sideways or slightly bearish markets. That means that investors can benefit not only from the income generated by the options premiums but also from the potential for capital appreciation. 
  • Downside protection: The premiums from selling call options can provide some downside protection in falling markets. The income from the options can offset some of the portfolio's losses, providing a cushion against the impact of market declines. 
  • Professional management: Covered-call ETFs are managed by professionals who actively select and write call options on the stocks in the portfolio. This active management can be appealing to investors who prefer a hands-off approach to generating income and managing risk. 
  • Diversification: Covered-call ETFs typically hold a diversified portfolio of stocks, which can help spread risk across different sectors and industries. 

While considering these benefits, investors should also note the potential drawbacks of covered-call ETFs, including limited upside potential in big market rallies, higher expense ratios and tax considerations, such as the potential for short-term capital gains and non-qualified dividends. 

Covered-Call ETFs for Income Investors 

Covered-call ETFs are often considered good investments for income-seeking investors primarily because the income generated from selling call options can significantly enhance the overall yield of the ETF compared to simply owning the underlying stocks. This enhanced yield can provide a higher level of income than traditional dividend-focused ETFs

The income generated by a covered-call ETF is distributed to investors in the form of dividends or distributions. Furthermore, the income generated from selling call options can provide a cushion against potential losses in the ETF's underlying stocks. In a declining market, the option premiums can offset some of the portfolio's losses, offering downside protection. 

The largest covered call ETF is the Global X NASDAQ 100 Covered Call ETF (QYLD) with $7.49 billion in assets. The largest ETF to use covered call writing as part of its overall strategy is the JPMorgan Equity Premium Income ETF (JEPI), which has $28.82 billion in assets.

The 5 Best Covered-Call ETFs by 2023 Performance 

TickerFundYTD ReturnAUMExpense Ratio
QYLGGlobal X Nasdaq 100 Covered Call & Growth ETF23.75%$101.67M0.60%
TYLGGlobal X Information Technology Covered Call & Growth ETF19.07%$3.44M0.60%
QYLDGlobal X Nasdaq 100 Covered Call ETF15.38%$7.49B0.60%
FTHIFirst Trust BuyWrite Income ETF11.02%$279.83M0.85%
OVLOverlay Shares Large Cap Equity ETF9.56%$146.65M0.80%

Data as of October 31, 2023. Only ETFs that use covered call writing as a primary strategy were considered. ETNs and leveraged ETFs were not included in our search.

Is Now a Good Time to Invest in Covered-Call ETFs? 

Covered-call ETFs can be beneficial in certain environments and for specific types of investors. For example, covered-call strategies are often more effective in markets with lower volatility or those that are trading within a relatively narrow range. In such environments, the premiums received from selling call options can contribute significantly to overall returns without missing out on substantial price gains. 

That is what has made covered-call strategies work well in 2023. Other than mega-cap tech stocks, most stocks had lackluster returns in during the year, and the enhanced income from covered calls made these funds more attractive than traditional dividend ETFs. 

As for 2024, if the economy slows or slides into recession, covered-call strategies can provide a degree of downside protection in falling markets. If you want to reduce the impact of market downturns on your portfolio while still participating in potential upside, covered-call ETFs can be helpful. 

Above all, covered-call ETFs are most suitable for income-seeking investors who prioritize regular income distributions, not long-term investors seeking growth. If you depend on steady cash flow for living expenses or wish to boost your investment income, these ETFs can be a valuable addition to your portfolio. 

Additionally, investors should consider factors such as expense ratios, management fees and tax implications when evaluating covered-call ETFs. 

Kent Thune is Research Lead for etf.com, focusing on educational content, thought leadership, content management and search engine optimization. Before joining etf.com, he wrote for numerous investment websites, including Seeking Alpha and Kiplinger. 

 

Kent holds a Master of Business Administration (MBA) degree and is a practicing Certified Financial Planner (CFP®) with 25 years of experience managing investments, guiding clients through some of the worst economic and market environments in U.S. history. He has also served as an adjunct professor, teaching classes for The College of Charleston and Trident Technical College on the topics of retirement planning, business finance, and entrepreneurship. 

 

Kent founded a registered investment advisory firm in 2006 and is based in Hilton Head Island, SC, where he lives with his wife and two sons. Outside of work, Kent enjoys spending time with his family, playing guitar, and working on his philosophy book, which he plans to publish in the coming year.