This excellent article on covered call ETFs is published on Sure Dividend and they have given us permission to post it here. You should read this post alongside this primer on covered calls. Covered call selling is not a strategy we follow here at Tim Thomas, but it’s an established strategy that can be used very effectively as part of a portfolio.
Income investors looking for a steady stream of dividend payments may want to consider covered call ETFs. These funds offer the potential for income generation through the sale of call options on underlying holdings.
This type of asset can work particularly well in a market that’s rising, as it allows investors to benefit from the market’s gains while also collecting premium income.
Investing in a covered calls typically helps mitigate the risk associated with owning stocks outright, while still allowing investors to generate income from their portfolios.
But it’s important to understand how these funds work before buying in and to weigh the benefits of an income stream against the potential for missed upside.
There are a number of covered call ETFs available today. For those looking for new ways to protect their retirement funds or simply seeking an income-generating strategy, we’ve compiled six of the best covered call ETFs on the market.
6. Invesco S&P 500 BuyWrite ETF (PBP)
The Invesco S&P 500 BuyWrite ETF (PBP) is one of the most popular covered call ETFs on the market. It seeks to track the performance of the S&P 500 Index, while also generating income through the sale of options on the underlying stocks.
As of May 2022, the fund’s yield stands at 1.08%, making it one of the lowest yield funds on the list.
However, one of the key advantages that PBP offers is its low expense ratio. At just 0.49%, it’s one of the cheapest covered call ETFs available.
The fund has a solid track record and for those investors looking for capital preservation in their investment portfolio, PBP may be the right covered call ETF.
5. Amplify CWP Enhanced Dividend Income ETF (DIVO)
The Amplify CWP Enhanced Dividend Income ETF (DIVO) is a high-yield covered call ETF that seeks to provide investors with high income and capital appreciation.
The ETF focuses on generating high returns through a strategy of selling call options on stocks or other securities while also holding a portfolio of underlying assets.
By selling call options, the ETF is able to collect premiums which help boost overall returns.
And by holding a mix of underlying assets, the ETF is able to provide some protection against market volatility.
DIVO’s portfolio consists of 20-30 stocks that are large-cap, high-dividend paying companies. The ETF has a yield of 4.92% and an expense ratio of 0.55%.
DIVO is unique in that it uses an excellent strategy to determine when to sell covered calls on each security.
This helps the ETF generate high returns while still providing some downside protection.
4. Nationwide Nasdaq 100 Risk-Managed Income ETF (NUSI)
The Nationwide Nasdaq 100 Risk-Managed Income ETF (NUSI) is a high-yield covered call ETF that invests in high-quality, high dividend-paying stocks from the Nasdaq 100 index.
To limit downside risk, NUSI uses a dynamic hedging strategy that involves periodically selling out-of-the-money put options against its stock holdings.
This allows investors to benefit from market upside potential while also protecting their capital in times of volatility and drawdown.
NUSI offers an impressive yield of 7.56% and has delivered stellar returns over the past year.
For those looking for high-yield covered call ETFs, NUSI is an excellent choice.
3. Global X S&P 500 Covered Call ETF (XYLD)
The Global X S&P 500 Covered Call ETF (XYLD) is a high-yield covered call ETF that invests in high-quality, high dividend-paying stocks from the S&P 500 index.
With a 9.58% yield, XYLD is one of the highest-yielding covered call ETFs on the market.
The ETF uses a covered call writing strategy to provide shareholders with consistent monthly income while limiting downside exposure in the event of a market downturn.
However, it’s important to note that it uses a 100% option overlay, meaning that the fund does not hold any underlying assets.
This makes it more volatile than other covered call ETFs but also provides the potential for higher returns.
If investors are comfortable with a little extra volatility in their investment portfolio, XYLD could be the right high-yield covered call ETF.
2. Global X Russell 2000 Covered Call ETF (RYLD)
The Global X Russell 2000 Covered Call ETF (RYLD) is one of the best high-yield covered call ETFs on the market.
It invests in a small-cap portfolio and writes call options over that portfolio, which earns it higher-income premiums.
The yield on RYLD is high, at 11.11%, and it has delivered strong returns over the past year. In addition, RYLD provides investors with high-level risk management, as it utilizes a dynamic hedging strategy that limits downside risk and maximizes total returns.
However, because it’s writing call options over a small-cap portfolio, it may experience share price declines if the underlying small-cap stocks perform poorly.
Nonetheless, RYLD still offers investors high yields and is a great option for those looking to generate additional income from their portfolios.
1. Global X Nasdaq 100 Covered Call ETF (QYLD)
The Global X Nasdaq 100 Covered Call ETF (QYLD) is one of the market’s best high-yield covered call ETFs.
It follows the NASDAQ 100 Index, which is made up of the 100 largest and most liquid stocks traded on the NASDAQ exchange. The index is weighted by market capitalization, so the largest companies have the greatest impact on returns.
To generate income, QYLD writes (sells) at-the-money-covered calls against all of its holdings.
This is a very simple and straightforward strategy that can provide regular income payments every month. Income investors will appreciate QYLD’s high yield potential. QYLD pays a yield of 11.80%, making it one of the highest yield investments on the market.
This is a much higher yield than is typically available on stocks or other ETFs, making QYLD a great option for income investors.
Conclusion on High-Yield Covered Call ETFs
If investors are looking for high-yield covered call ETFs, the six options we’ve highlighted above are a great place to start. All of these funds use a covered call writing strategy to provide shareholders with regular income payments and limit downside risk in the event of a market downturn. And, best of all, they offer high yields that range from 3.4% to 12%.
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Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
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Tim Thomas has no positions in the stocks, ETFs, cryptocurrencies, or commodities mentioned.
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