Strong Performing Covered Call ETFs | ETF Trends

Earlier in March, I joined ETF Prime with Nate Geraci. We discussed the status of his 2024 ETF predictions. He believed the covered call ETF market was too saturated. In Geraci’s view, once advisors understand how these funds underperform in bull markets, they will take their money out. I disagreed.  

In my response, I focused on the growing supply of covered call ETFs from Swan Global and others. I also covered how money continued to flow into the largest of these funds despite a strong start for the traditional S&P 500 Index in 2024.  

However, I wanted to circle back on the performance, as the returns of a covered call ETF is likely to be different than that of the broader market. 

“They are a great strategy to create income, but a lot of people do not understand the trade-off,” explained Simeon Hyman, global investment strategist at ProShares, at the Exchange conference. “If you sell a call, you are getting income… but you are giving up the upside in the market.” 

The Global X S&P 500 Covered Call ETF (XYLD) takes an index-based covered call approach. XYLD buys all the stocks in the S&P 500 Index, and on a monthly basis, writes corresponding at-the-money call options on the index. The 10-year old XYLD seeks to track the Cboe S&P 500 BuyWrite Index.  

In the one-year period ended March 18, XYLD was up 12%, lagging the 33% gain in the SPDR S&P 500 ETF Trust (SPY). Year to date, SPY climbed 8.2%, while XYLD rose 3.9%. 

In a recent piece, we covered the growing supply of covered call strategies. We focused on the differences between those writing options on an index and those selectively writing on stocks. We spent less time on the frequency of the options writing and the ETFs’ performance records. Following are a few examples of relatively strong performers. 

Taking an Active Approach Can Be Rewarding 

The NEOS S&P 500 High Income ETF (SPYI) launched in August 2022 and manages $930 million in assets. The ETF pulled in more than $300 million this year. SPYI invests in the full constituents from the broader index, but is actively managed using a data-driven call option strategy. The firm has deep options expertise. In the one-year period ended March 18, SPYI was up 22%, outperforming XYLD by 1,000 basis points. Thus far in 2024, SPYI’s 6.2% gain was more than 200 basis points stronger.   

Meanwhile, the BlackRock Advantage Large Cap Income ETF (BALI) launched in September 2023. While the ETF is small, with just $23 million in assets, the fund is up 7.8% thus far in 2024. BALI uses a systematic stock selection process and writes calls on top of them. 

I SPY With My Little Eye… 

Another relatively strong performer among covered call ETFs is the ProShares S&P 500 High Income ETF (ISPY). The fund is index based but tracks the S&P 500 Daily Covered Call Index. By writing options every day, it has a better chance of capturing market returns while generating some extra income. ISPY launched in mid-December 2023. Year to date, the $60 million ETF is up 5.8%.  

These three ETFs are up more thus far in 2024 than the covered call ETF industry leader. The JPMorgan Equity Premium ETF (JEPI) rose 5.1% and gathered $1.3 billion. In the past year, JEPI’s gain of 18% was roughly half that of the S&P 500 Index.  

We think as advisors dive deeper into this ETF segment, they will begin focusing more on relative performance.  

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