Covered Call ETFs

December 2, 2025

In the traditional investment model, most folks have two assets to pick from – stocks and bonds.  Today, we’re gonna talk about another option – the covered call strategy.  

This strategy has been gaining popularity in recent years in the form of ETFs.  Now, a covered call strategy is nothing new.  It’s been around for a long time.  The downside is that it’s hard for a non-trading person to execute, since it involves multiple steps and regular monitoring.  But now, large asset managers are packaging this strategy into easy-to-buy ETFs.  This makes it much easier to implement and add to your portfolio without the trouble of having a dedicated trader on staff.

What does a covered call strategy do?  The mechanics are a little hard to understand at first. (It involves derivatives.)  So let’s start with the purpose.  Covered call ETFs aim to generate higher levels of dividend-like income and reduced market volatility.  That’s an attractive option for folks looking for higher income or lower volatility (or maybe both).  

See the chart below.  Here I’m comparing average returns over the past 5 years.  As a reminder, the annual return on your stock or index fund is a result of two things:

(1) how much did the price change in the year

(2) how much dividend income did you get.

Below, I’ve broken these two pieces apart to highlight where the total return came from.

So the two main benefits are higher income and lower volatility.

First:  higher dividend income.  Look at the yellow highlighted boxes.  This is the 5-yr avg. income yield for stocks, covered call ETFs, and bond ETFs.   Covered call ETFs provided a higher level of income than either stocks or bonds.  So, if youre an “income-focused” investor, this could be an attractive alternative.  

Second:  reduced volatility.   Now look at the blue highlighted boxes.  In 2022, inflation spiked.  That caused the Fed to raise interest rates dramatically.  Those rising interest rates hurt both bonds and stocks that year.   However, the covered call ETFs had a smaller loss than either stocks or bonds, due to the high income yield and their lower stock exposure.

Okay, sounds great.  What’s the problem?  The problem is that this strategy has less upside.   You can see the S&P 500 outperformed the covered call strategy by more than double in the gung-ho years of 2023 and 2024.  As such, this strategy is more of a “stay rich” approach, rather than a “get rich” approach.  It depends on your particular time horizon and risk profile.

Unfortunately, I’m constrained by space here.  And there’s lots more to say.  (I haven’t even explained how they work!)  But if you’d like a deeper dive, feel free to reach out.  The tickers in my covered call ETF basket are: JEPI, XYLD, and DIVO.