Why Claiming to Find the "Best" Covered Call ETF Can Mislead Investors

Over the past few years, if you’ve scrolled through investment blogs or financial newsletters, you’ve likely encountered enthusiastic pitches for covered call ETFs. These funds have experienced explosive growth, with assets under management skyrocketing from approximately $18 billion in early 2022 to roughly $80 billion by mid-2024, according to Morningstar data. The appeal is undeniable: investors are drawn to the promise of stock market exposure paired with bond-like income streams and reduced volatility. JPMorgan’s Equity Premium Income ETF (JEPI), the nation’s largest actively managed ETF, markets itself as delivering “a significant portion of the returns associated with the S&P 500 index with less volatility.” Yet before you jump on this trend, it’s worth understanding why these funds might not be the straightforward win they initially appear to be.

Understanding the Appeal: Why Covered Call ETFs Attract Billions

So what’s driving this surge in popularity? The answer lies in what covered call ETFs promise to deliver. To understand this, let’s start with the basics of how a covered call works.

A covered call is a relatively simple concept: you own a stock, and you simultaneously sell (or “write”) a call option on that same stock. When you sell the option, you pocket a premium from the buyer, but you accept a specific constraint—if the stock price rises above a predetermined level (the strike price), your stock gets called away, meaning the buyer takes ownership of it. If the stock price stays below the strike price, you keep both the stock and the premium. It’s a trade-off: you’re giving up unlimited upside in exchange for guaranteed income.

Now apply this concept to an entire fund. A covered call ETF purchases a basket of stocks—typically tracking an index like the S&P 500—and then systematically sells call options against those holdings. Most execute this monthly, though some do it daily. The mechanics sound appealing: you get stock market participation without the wild swings, plus monthly income injections. The catch? You pay fund management fees that are meaningfully higher than standard index ETFs, and these fees eat into your actual returns.

How the Covered Call Strategy Actually Works—And Its Hidden Costs

Let’s look under the hood. A covered call strategy is, at its core, a bet that you can generate steady income by selling volatility. When markets are calm or rising modestly, this approach shines. The fund collects option premiums, the stocks tick upward at a manageable pace, and investors feel like they’ve found the investment holy grail—consistent gains without the stress.

But here’s the critical insight: covered call ETFs don’t like volatility. In fact, they fear it. When markets surge sharply upward, the call options the fund has sold are likely to be exercised, meaning the underlying stocks get called away. The fund either has to deliver those shares at a predetermined price (capping gains) or buy back the options at a loss to retain the position. Either way, the investor misses out on the full upside. Conversely, when markets tank and volatility spikes, the modest income from selling options provides almost no cushion against losses—the fund falls right alongside the market but with less of the gain when things recover.

The fundamental cost isn’t just the explicit management fee. It’s the opportunity cost. You’re structurally capping your upside potential. Over decades, this compounds into a significant drag on wealth-building.

The Performance Reality: When Covered Call ETFs Fall Behind

Theory meets reality when we examine actual performance data. In 2024, as of mid-year, the S&P 500 Index had delivered a 14.5% year-to-date return. Compare that to the Cboe’s S&P 500 Buywrite Index (BXM), which tracks covered call strategies on the S&P 500—it lagged at just 10.6% for the same period. JEPI performed even weaker, returning under 6% year-to-date.

The gap becomes even more pronounced in the Nasdaq space. The Nasdaq-100 Index posted a 10.6% year-to-date gain through mid-2024, while the Global X Nasdaq-100 Covered Call ETF (QYLD)—a popular choice for income-focused investors—managed to eke out less than 1% for the same period. These aren’t marginal differences; they represent substantially different financial outcomes for investors.

Why? Because covered call ETFs are essentially selling volatility, and when markets move with force in either direction, that strategy gets exposed. In a genuinely bullish market, traditional long-only index ETFs capture the full upside while covered call ETFs do not. The income stream simply cannot compensate for this structural disadvantage when compounded over years.

Beyond Covered Call ETFs: Where to Find Real Income Growth

For long-term investors, covered call ETFs present a fundamental problem: they’re not truly buy-and-hold vehicles. The continuous upside cap means you’re trading long-term wealth-building for short-term income. It’s a tempting proposition when you’re focused on monthly or quarterly returns, but it’s a suboptimal strategy across a full investment lifetime.

If income is your priority, consider pivoting toward dividend-paying stocks and ETFs focused on dividend-paying companies. Yes, they offer less certainty of income in any given month, but they provide true participation in corporate growth and market appreciation. They don’t cap your upside. They align your interests with the underlying businesses’ success rather than betting against volatility.

The covered call ETF boom reflects a very human impulse: the desire to have your cake and eat it too. But markets rarely work that way. Every strategy involves trade-offs, and understanding those trade-offs—rather than being seduced by marketing narratives—is what separates successful long-term investors from those chasing the latest trend.