Covered Call ETFs vs. Do-It-Yourself: What’s Right for You?

Jesse Anderson

Covered calls have become a popular way to generate income. For instance, the JPMorgan Equity Premium Income ETF (NYSE: JEPI), one of the largest actively managed ETFs with more than $30 billion in assets under management, uses a covered call-like strategy to generate an attractive 8% to 9% “dividend” yield.

But if you’re familiar with how options work, you might be wondering whether covered call ETFs are worth the cost or if you could do better with a do-it-yourself approach. After all, a DIY approach would let you select specific stocks where you’re comfortable giving up upside potential while ensuring the broader portfolio matches your goals.

In this article, we’ll take a closer look at how covered call ETFs work and help you decide whether you should consider these funds or do it yourself.

What Are Covered Calls?

Covered calls involve selling (writing) a call option against an underlying (long) stock position, giving someone the right to purchase your stock at a specific price and time. In exchange for selling these rights, you receive an upfront payment (the option premium) but could sacrifice potential upside if the stock moves above the option’s strike price before expiration.

Covered calls lower your breakeven point for a long stock position (via a cash premium) in exchange for capping upside potential. 

The two most common reasons to use covered calls are:

  • Income – Covered calls generate immediate cash income above and beyond any dividend payments. And unlike bonds, you can still benefit from some capital appreciation if you write out-of-the-money call options.
  • Protection – The income generated from covered calls also lowers your cost basis, effectively “taking some money off the table” and reducing your downside risk. In other words, it provides a “buffer” for your portfolio.

If you’re interested in learning more about the basics of covered calls, check out our recent article on Why Income Investors Shouldn’t Ignore Covered Calls.

How Covered Call ETFs Work

Exchange-traded funds (ETFs) are professionally managed portfolios of stocks, bonds, and other securities that you can buy on a stock exchange – like you would a typical stock. Unlike mutual funds, ETF transactions are processed throughout the trading day. They’re also typically lower cost and more tax-efficient than mutual funds for structural reasons.

To see how a covered call ETF works, let’s look at the Global X S&P 500 Covered Call ETF (NYSE: XYLD). The fund managers buy the S&P 500 index components and write monthly at-the-money call options. While this forfeits 100% of the stocks’ upside potential, the strategy generates an 8% to 9% yield that outpaces most dividend-only funds.

Of course, not all covered call ETFs use the same strategy. For example, the Global X S&P 500 Covered Call & Growth ETF (NYSE: XYLG) only sells covered calls against 50% of its assets, which leaves much more room for upside but sacrifices some yield. Other funds use covered calls with other strategies, like collars, to balance income and risk. 

The largest covered call ETFs include:

TickerFund NameAssetsExpense Ratio
QYLDGlobal X NASDAQ 100 Covered Call ETF$7.72 Billion0.60%
XYLDGlobal X S&P 500 Covered Call ETF$2.83 Billion0.60%
BUFRFT CBOE Vest Fund of Buffer ETF$2.44 Billion1.05%
KNGFT CBOE Vest S&P 500 Dividend Aristocrats Target Income ETF$1.62 Billion0.75%
RYLDGlobal X Russell 2000 Covered Call ETF$1.45 Billion0.60%
* Data as of November 24, 2023, via

Finally, actively managed ETFs – like the JPMorgan Equity Premium Income ETF mentioned earlier – take a hybrid approach. The fund hand-picks individual long stock positions but writes “naked” call options on indexes, knowing that its overall balance remains intact. Other “buffer” ETFs focus more on downside protection than income generation using covered calls.

Should You Do It Yourself?

Covered call ETFs make it easy to hold a broad portfolio and generate incremental income with covered calls, but there are some important trade-offs to keep in mind.

Comparing the Costs

Most ETFs charge an expense ratio, which is expressed as an annual percentage. For instance, a fund with a 1% expense ratio charges 1% of the amount you invest per year in fees. While that may not sound like a lot of money, the impact of fees can be significant when you factor in the compounding effects of that money – had it been invested – over time.

But, of course, building your portfolio and executing option trades also involves fees. While some brokers provide zero-commission trades, you should still consider the time investment of building a portfolio and executing monthly covered calls. And you may pay higher spreads than institutional funds that trade blocks of shares or incur other costs you wouldn’t with ETFs.

Flexibility & Control

Most covered call ETFs hold a popular index, such as the S&P 500 or Russell 2000. While some investors prefer to hold these large indexes, many investors prefer to hold specific subsets of the market, such as value stocks or dividend stocks. These slivers of the market can help achieve specific outcomes, like lowering risk or increasing income.

If you want to build your portfolio, you’ll need to write your covered calls. In addition to the added flexibility, building your portfolio can help you fine-tune your holdings to your risk tolerance, return expectations, and your own insights. For example, you might want to write covered calls against value stocks to minimize risk while still generating income.

Tax Considerations

Covered call ETFs can trigger capital gains and income taxes. Typically, you owe income tax on any distributions and capital gains tax on any increase in value when you sell the fund. However, you don’t owe any capital gains taxes on any individual security within the fund. And if you hold the ETF for more than a year, you’ll pay the lower long-term capital gains tax rate.

On the other hand, building your portfolio and writing covered calls generally result in higher taxes. Each time you buy and sell a security, you owe capital gains taxes on that security in addition to income tax on any dividends or premium income. Moreover, if you buy and sell within a year, you’ll owe the short-term capital gains tax rate. 

Simplifying a DIY Approach

Many investors choose covered call ETFs due to the complexity of managing their portfolio. But with the right tools and education, adding covered calls to your portfolio doesn’t necessarily involve a steep learning curve and hours of time each week.
Option screeners are a good starting point. If you’re looking to maximize income, optionDash makes it easy to find the highest-yielding opportunities while factoring in intrinsic value, downside protection, and other factors if you prefer. That way, you can build a portfolio to reach your income objectives without digging through hundreds of stocks by hand.

Covered Call ETFs
optionDash makes it easy to discover the best opportunities with your target timeframes. Source: optionDash

After finding the right opportunities, you’ll need to decide on the best options to write and how to manage the position over time. For instance, if the stock starts moving higher, should you roll-up or roll-out the option to avoid assignment? Or, if the stock moves lower, should you sell the stock and buy back the option or hold onto it a bit longer?

Snider Advisors offers a pre-built strategy for creating a covered call portfolio and generating a target 1% monthly income. In addition, you can sign up for the Lattco platform, where you can automatically identify and execute covered call opportunities. The result is a much smoother and more predictable process for those looking to take a DIY approach.

The Bottom Line

Covered calls are a popular way to generate portfolio income. When choosing between using covered call ETFs or taking a DIY approach, you should consider your investment objectives and the trade-offs when it comes to costs, flexibility, and tax considerations. And, of course, you can simplify the process with tools like the optionDash covered call screener.

If you’re interested in taking a DIY approach, take our free e-course and discover a prebuilt system that helps you avoid many of the most common mistakes. Or, if you want a hands-off approach without the generic holdings of an ETF, inquire about our asset management services.

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