MW These ETFs will give you high income - but you need to learn about their strategies first
By Philip van Doorn
Exchange-traded funds using options to generate income have become popular. They take a variety of approaches to providing income and growth.
Exchange-traded funds that use covered call options to generate income have become popular enough to be advertised on television. This investing approach can provide investors with a high monthly income, but the various strategies can have important tax consequences and can also affect how well the funds capture the upside of the stock market.
Covered call options
You might already be familiar with covered call options, but before digging into strategies and comparing some covered call funds' distribution yields and performance, it may help to review a few definitions.
A call option is a contract that allows an investor to buy a security at a particular price (called the strike price) until the option expires. A put option is the opposite, allowing the purchaser to sell a security at a specified price until the option expires.
A covered call option is one that you write when you already own a security. The strategy is used by stock investors to increase income and provide some downside protection.
For example, let's say you own 100 shares of a company and the current share price is $100. You are happy with this investment but would be willing to sell the stock if it were to rise to $110. You can sell an option to another investor allowing them to buy the stock for $110 (the strike price) until the option expires. You will receive a premium for selling the option.
If the stock rises above $110 before the option expires, you will be forced to sell it for $110 no matter how high the share price has risen. If the stock doesn't rise to $110 before the option expires, you keep your premium and can write another option.
In the above example, the $110 call option written when the stock is trading for $100 is known as an "out of the money" option, because the strike price is higher than the current market price. An "in the money option" is one in which the strike price is lower than the current price. If the market price and strike price are equal, the option is "at the money."
Covered call options generate income, which can also be considered downside protection for a portfolio. In return, the investor gives up any upside above the strike price. That is the trade-off.
Various covered call strategies
An individual investor can write covered calls on individual stocks, with or without the help of an investment adviser, but this active strategy is time-consuming.
You can also pursue covered call strategies with various exchange-traded funds and through some closed-end funds and even traditional open-ended mutual funds.
Fund pricing: A mutual fund's net asset value is its total assets divided by the number of shares. This is the only share price for a traditional open-ended mutual fund, which is priced once a day at the market close. That is also the only time at which an investor can buy or sell shares of an open-ended mutual fund. An exchange-traded fund has an NAV but it also has a share price, since it trades on an exchange, and that share price may be at a premium or a discount to the NAV. Market makers will decide when an ETF should add or redeem shares based on how high that premium or discount might be.
Some funds use covered calls to generate income while holding a portfolio of stocks selected by the fund managers. For example, the $4.8 billion Amplify CWP Enhanced Dividend Income ETF DIVO typically holds a portfolio of about 25 to 30 stocks of large, stable U.S. companies that pay dividends. The stocks are selected by Capital Wealth Planning of Naples, Fla., the fund's subadviser. The portfolio managers at Capital Wealth Planning will write covered calls on a few of the stocks at a time, depending on whether or not market conditions make for attractive option premiums.
DIVO pays a monthly distribution of dividend and option income. Its distribution rate - an annualized figure based on the most recent payout - is 4.73%. But that distribution rate can vary greatly. If we add up the fund's past 12 monthly distributions, the total has been $1.975, for a trailing distribution yield of 4.58%, based on the fund's NAV of $43.11 at Monday's close. (In case you are wondering, DIVO's closing share price on Monday was $43.16.)
For one year through Monday, DIVO returned 14.2%, compared with returns of 10.5% for the Dow Jones Industrial Average DJIA and 18.6% for the S&P 500 SPX, according to FactSet. All investment returns in this article include reinvested dividends or fund distributions and are net of fund expenses. In the case of DIVO, annual expenses come to 0.56% of assets under management. This means that for a $10,000 investment, your annual expenses would come to $56.
So DIVO's performance over the past year has provided an example of how a covered call strategy can provide monthly income along with stock-market growth, while in this case and at least for this period giving up some of the S&P 500's upside.
While DIVO writes a small number of individual covered call options on stocks that it holds, many ETFs will write covered calls against entire indexes or make use of equity-linked notes to pursue a similar strategy.
Return of capital: Some income-producing equity funds will return investors' own capital to them as part of (or even most of) the distribution. This may at first seem to be a mystifying practice, but it can provide some advantages to investors. The return of capital can help fund managers reduce the variability of monthly distributions over time. And returning some capital rather than distributing all of a fund's taxable income or capital gains can provide an immediate tax advantage to shareholders. A return of capital also lowers the shareholder's cost basis, making for a larger capital gain (or smaller capital loss) if the investor sells the fund's shares.
An example of a closed-end fund that has had a long record of strong returns while consistently returning capital has been the Eaton Vance Enhanced Equity Income Fund II EOS, which MarketWatch profiled in December.
If a fund's underlying stocks have been rising, there is "cover" for the return of capital - it won't cause the NAV to decline over the years. Then again, there are cases in which returns of capital have caused NAVs to decline significantly over the long haul.
One more thing about distributions from funds that generate income from covered calls: Distributed option premium income is fully taxable. Unlike "qualified dividends" on stocks, the income is not subject to preferential treatment under U.S. tax law.
Three examples of covered call ETFs based on the Nasdaq-100
The Nasdaq-100 Index NDX is made up of the largest 100 nonfinancial companies in the full Nasdaq Composite Index COMP. It is tracked by the Invesco QQQ Trust QQQ.
Here are three covered call ETFs that hold and pursue the covered call strategy with the Nasdaq-100 and make monthly income distributions, sorted by when the funds were established:
-- The $8.4 billion Global X Nasdaq-100 Covered Call ETF QYLD was established in December 2013. Once each month, the fund writes an at-the-money one-month covered call option on the entire Nasdaq-100 Index. The fund quotes a current distribution rate of 11.60% based on Monday's NAV. This strategy means the fund can be expected to sell all of its equity positions during a month in which the Nasdaq-100 Index rises after the option is written. The fund's annual expenses come to 0.60% of assets.
-- The $27.8 billion JPMorgan Nasdaq Equity Premium Income ETF JEPQ was launched in May 2022. It is actively managed and holds most stocks in the Nasdaq-100 while using equity-linked notes to write one-month out-of-the-money call options on the index. There were 15 laddered equity-linked notes listed in the portfolio as of Monday, making for a far more active option-trading strategy than that followed by QYLD. The fund quotes a trailing distribution yield of 10.42%. Its expense ratio is 0.35%.
-- The $295 million Invesco QQQ Income Advantage ETF QQA was established on July 17, 2024. The fund holds half its portfolio in stocks that make up the Nasdaq-100 Index and uses equity-linked notes daily to write laddered one-month call options on the Nasdaq-100 Index with the rest of the portfolio. So this option-trading strategy is even more active that that followed by QYLD. This fund quotes a trailing distribution rate of 9.97% and its expense ratio is 0.29%.
Two aspects of performance
Let's begin our performance comparisons with a short period. This chart shows total returns for QQQ, which tracks the Nasdaq-100 Index, and the three Nasdaq-100-based covered call ETFs, in the order presented above, for one year through Monday:
The Nasdaq-100 had an excellent 12-month total return, although the chart makes clear that the broad stock market went through a period of volatility from mid-March through early May, with the biggest decline from April 2, when President Donald Trump made his first tariff announcements, though April 8.
You can see on the chart that QYLD was the worst performer of the three covered call funds for the one-year period, while QQA - which has the most actively managed covered call strategy of the three - performed the best.
During an interview with MarketWatch on July 28, John Burrello, Invesco's senior portfolio manager for the firm's Advantage ETF Suite, said the past 12 months had captured about 85% of the Nasdaq-100's upside. He said investors can expect the participation rate to be closer to 75%, but that "it can be much better than that if you get a mix of down, flat and up environments, as we have had over the past year."
MW These ETFs will give you high income - but you need to learn about their strategies first
By Philip van Doorn
Exchange-traded funds using options to generate income have become popular. They take a variety of approaches to providing income and growth.
Exchange-traded funds that use covered call options to generate income have become popular enough to be advertised on television. This investing approach can provide investors with a high monthly income, but the various strategies can have important tax consequences and can also affect how well the funds capture the upside of the stock market.
Covered call options
You might already be familiar with covered call options, but before digging into strategies and comparing some covered call funds' distribution yields and performance, it may help to review a few definitions.
A call option is a contract that allows an investor to buy a security at a particular price (called the strike price) until the option expires. A put option is the opposite, allowing the purchaser to sell a security at a specified price until the option expires.
A covered call option is one that you write when you already own a security. The strategy is used by stock investors to increase income and provide some downside protection.
For example, let's say you own 100 shares of a company and the current share price is $100. You are happy with this investment but would be willing to sell the stock if it were to rise to $110. You can sell an option to another investor allowing them to buy the stock for $110 (the strike price) until the option expires. You will receive a premium for selling the option.
If the stock rises above $110 before the option expires, you will be forced to sell it for $110 no matter how high the share price has risen. If the stock doesn't rise to $110 before the option expires, you keep your premium and can write another option.
In the above example, the $110 call option written when the stock is trading for $100 is known as an "out of the money" option, because the strike price is higher than the current market price. An "in the money option" is one in which the strike price is lower than the current price. If the market price and strike price are equal, the option is "at the money."
Covered call options generate income, which can also be considered downside protection for a portfolio. In return, the investor gives up any upside above the strike price. That is the trade-off.
Various covered call strategies
An individual investor can write covered calls on individual stocks, with or without the help of an investment adviser, but this active strategy is time-consuming.
You can also pursue covered call strategies with various exchange-traded funds and through some closed-end funds and even traditional open-ended mutual funds.
Fund pricing: A mutual fund's net asset value is its total assets divided by the number of shares. This is the only share price for a traditional open-ended mutual fund, which is priced once a day at the market close. That is also the only time at which an investor can buy or sell shares of an open-ended mutual fund. An exchange-traded fund has an NAV but it also has a share price, since it trades on an exchange, and that share price may be at a premium or a discount to the NAV. Market makers will decide when an ETF should add or redeem shares based on how high that premium or discount might be.
Some funds use covered calls to generate income while holding a portfolio of stocks selected by the fund managers. For example, the $4.8 billion Amplify CWP Enhanced Dividend Income ETF DIVO typically holds a portfolio of about 25 to 30 stocks of large, stable U.S. companies that pay dividends. The stocks are selected by Capital Wealth Planning of Naples, Fla., the fund's subadviser. The portfolio managers at Capital Wealth Planning will write covered calls on a few of the stocks at a time, depending on whether or not market conditions make for attractive option premiums.
DIVO pays a monthly distribution of dividend and option income. Its distribution rate - an annualized figure based on the most recent payout - is 4.73%. But that distribution rate can vary greatly. If we add up the fund's past 12 monthly distributions, the total has been $1.975, for a trailing distribution yield of 4.58%, based on the fund's NAV of $43.11 at Monday's close. (In case you are wondering, DIVO's closing share price on Monday was $43.16.)
For one year through Monday, DIVO returned 14.2%, compared with returns of 10.5% for the Dow Jones Industrial Average DJIA and 18.6% for the S&P 500 SPX, according to FactSet. All investment returns in this article include reinvested dividends or fund distributions and are net of fund expenses. In the case of DIVO, annual expenses come to 0.56% of assets under management. This means that for a $10,000 investment, your annual expenses would come to $56.
So DIVO's performance over the past year has provided an example of how a covered call strategy can provide monthly income along with stock-market growth, while in this case and at least for this period giving up some of the S&P 500's upside.
While DIVO writes a small number of individual covered call options on stocks that it holds, many ETFs will write covered calls against entire indexes or make use of equity-linked notes to pursue a similar strategy.
Return of capital: Some income-producing equity funds will return investors' own capital to them as part of (or even most of) the distribution. This may at first seem to be a mystifying practice, but it can provide some advantages to investors. The return of capital can help fund managers reduce the variability of monthly distributions over time. And returning some capital rather than distributing all of a fund's taxable income or capital gains can provide an immediate tax advantage to shareholders. A return of capital also lowers the shareholder's cost basis, making for a larger capital gain (or smaller capital loss) if the investor sells the fund's shares.
An example of a closed-end fund that has had a long record of strong returns while consistently returning capital has been the Eaton Vance Enhanced Equity Income Fund II EOS, which MarketWatch profiled in December.
If a fund's underlying stocks have been rising, there is "cover" for the return of capital - it won't cause the NAV to decline over the years. Then again, there are cases in which returns of capital have caused NAVs to decline significantly over the long haul.
One more thing about distributions from funds that generate income from covered calls: Distributed option premium income is fully taxable. Unlike "qualified dividends" on stocks, the income is not subject to preferential treatment under U.S. tax law.
Three examples of covered call ETFs based on the Nasdaq-100
The Nasdaq-100 Index NDX is made up of the largest 100 nonfinancial companies in the full Nasdaq Composite Index COMP. It is tracked by the Invesco QQQ Trust QQQ.
Here are three covered call ETFs that hold and pursue the covered call strategy with the Nasdaq-100 and make monthly income distributions, sorted by when the funds were established:
-- The $8.4 billion Global X Nasdaq-100 Covered Call ETF QYLD was established in December 2013. Once each month, the fund writes an at-the-money one-month covered call option on the entire Nasdaq-100 Index. The fund quotes a current distribution rate of 11.60% based on Monday's NAV. This strategy means the fund can be expected to sell all of its equity positions during a month in which the Nasdaq-100 Index rises after the option is written. The fund's annual expenses come to 0.60% of assets.
-- The $27.8 billion JPMorgan Nasdaq Equity Premium Income ETF JEPQ was launched in May 2022. It is actively managed and holds most stocks in the Nasdaq-100 while using equity-linked notes to write one-month out-of-the-money call options on the index. There were 15 laddered equity-linked notes listed in the portfolio as of Monday, making for a far more active option-trading strategy than that followed by QYLD. The fund quotes a trailing distribution yield of 10.42%. Its expense ratio is 0.35%.
-- The $295 million Invesco QQQ Income Advantage ETF QQA was established on July 17, 2024. The fund holds half its portfolio in stocks that make up the Nasdaq-100 Index and uses equity-linked notes daily to write laddered one-month call options on the Nasdaq-100 Index with the rest of the portfolio. So this option-trading strategy is even more active that that followed by QYLD. This fund quotes a trailing distribution rate of 9.97% and its expense ratio is 0.29%.
Two aspects of performance
Let's begin our performance comparisons with a short period. This chart shows total returns for QQQ, which tracks the Nasdaq-100 Index, and the three Nasdaq-100-based covered call ETFs, in the order presented above, for one year through Monday:
The Nasdaq-100 had an excellent 12-month total return, although the chart makes clear that the broad stock market went through a period of volatility from mid-March through early May, with the biggest decline from April 2, when President Donald Trump made his first tariff announcements, though April 8.
You can see on the chart that QYLD was the worst performer of the three covered call funds for the one-year period, while QQA - which has the most actively managed covered call strategy of the three - performed the best.
During an interview with MarketWatch on July 28, John Burrello, Invesco's senior portfolio manager for the firm's Advantage ETF Suite, said the past 12 months had captured about 85% of the Nasdaq-100's upside. He said investors can expect the participation rate to be closer to 75%, but that "it can be much better than that if you get a mix of down, flat and up environments, as we have had over the past year."
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July 30, 2025 07:04 ET (11:04 GMT)
MW These ETFs will give you high income - but you -2-
He explained that a strategy of having 50% in long equity positions can help with upside participation in a bull market. On the other hand, a combination of a high distribution rate and a lower participation rate could lead to a significant decline in a fund's NAV over the long term.
Burrello described QQA's strategy as an evolution beyond traditional passive indexed covered call strategies. "You need a strategy that has a total return that exceeds its yields over the long run," to prevent erosion of a fund's NAV. "There is no free lunch," he said.
And now for longer-term comparisons. We will compare the same ETFs as in the chart above, aside from QQA, which is only one year old, and add the aforementioned Eaton Vance Enhanced Equity Income Fund II (which has an expense ratio of 1.09%) and DIVO, for longer periods, depending on how long it has been since each fund was established. Below QQQ we will add the SPDR S&P 500 ETF Trust SPX, for reference.
Fund Ticker 3-year return 5-year return 10-year return
Invesco QQQ Trust Series I QQQ 87% 128% 452%
SPDR S&P 500 ETF Trust SPY 64% 113% 261%
Global X NASDAQ 100 Covered Call ETF QYLD 32% 46% 115%
JPMorgan NASDAQ Equity Premium Income ETF JEPQ 59% N/A N/A
Amplify CWP Enhanced Dividend Income ETF DIVO 43% 89% N/A
Eaton Vance Enhanced Equity Income Fund II EOS 69% 98% 261%
Source: FactSet
For three years, JEPQ has outperformed QYLD by a significant margin. And as you go further out, you can see that the longer the period, the more pronounced is QYLD's underperformance to QQQ.
EOS has been impressive, outperforming SPY for three years and matching SPY for 10 years, although it has trailed for the five-year period.
Investors interested in the high monthly income offered by this type of fund must expect lower overall performance than that of underlying indexes over time, as giving up some upside is the price for the flow of option-generated income. But the devil is in the details - you don't want to give up too much upside, and the more active option strategies, combined with the long equity exposure in most of the funds discussed here, can increase upside participation.
For QYLD, the 10-year total return was 115% through Monday - only a quarter of what QQQ returned for the same period. Meanwhile, QYLD's share price declined 29% from $23.62 on July 28, 2015, to $16.77 on Monday. For this fund, returns of capital are typically a high percentage of distributions. And they lower the NAV and the share price. Through July, more than 98% of QYLD's distributions have been returns of capital.
Again, QYLD's returns of capital have deferred taxes for QYLD's longer-term shareholders. But the practice can be confusing to investors. For example, if a long-term investor looks to sell QYLD shares at a loss in order to offset capital gains from the sale of other investments, they had better check their adjusted cost basis on the QYLD shares to make sure they will really book a capital loss.
Don't miss: 10 dividend stocks with yields up to 6.92% and plenty of cash flow for higher payouts
-Philip van Doorn
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