Covered Call ETFs Have Boomed – But Can They Be More?

Investors have plenty of reasons to celebrate the covered call ETF boom. Covered call strategies have offered new ways to add income to portfolios. Challenges in fixed income were a catalyst for assets to flow into traditional covered call ETFs. Those funds offer income, but at a costly trade-off, frequently limiting upside and long-term performance for those ETFs.

Key Takeaways:

• Covered call ETFs have become a very important part of the ETF landscape in recent years.
• That said, they come with notable tradeoffs, limiting performance by selling call options on underlying securities.
• Instead, daily call options can provide that income while also limiting the upside.

The recent emergence of covered call strategies powered by daily call options, however, may offer a path forward in the burgeoning category. Traditional covered call strategies cap upside as a tradeoff for delivering strong income. Those funds do so by selling call options that expire on a monthly basis.  If the underlying security rises and remains above its so-called “strike price”, investors will sacrifice total returns over time, as they may miss out on days or even weeks of a market rally.

Daily option strategies, like those offered by ProShares, differ in some critically important ways. ProShares’ covered call ETFs sell options that expire every day.   Even if the underlying securities rally through the strike price of the option that is sold, a new option is sold the next day.  Over time, this allows greater participation in the market’s upside.

Investors can gain exposure to those daily call options through ProShares’ ETFs such as ISPY, IQQQ, and ITWO. Each strategy seeks a high level of income, targets long-term equity market returns, and captures returns that traditional covered call strategies may sacrifice. The ProShares S&P 500 High Income ETF (ISPY), the ProShares Nasdaq-100 High Income ETF (IQQQ), and the ProShares Russell 2000 High Income ETF (ITWO) are pioneering the daily covered call approach.

See more: ProShares Leaders Q&A on Dividend Aristocrat Suite

As of April 30th, according to ProShares data, ISPY has produced a 26.86% NAV return over the last twelve months. It has produced a 4.38% 12-month distribution rate as of May 31st. Meanwhile, IQQQ has produced some pretty remarkable returns, also on a NAV basis. The fund returned 37.6% over the last year as of April 30th per ProShares data, with a 4.44% 12-month distribution rate as of May 31st.

Covered call ETFs have grown massively in popularity in recent years for their ability to provide high income. With daily call options, investors can get more, with IQQQ ISPY, and ITWO as appealing options to start.

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