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2022 was a pretty miserable year for stocks, but covered call ETFs finally got a chance to demonstrate their value. Sure, they mostly lost money this past year, but they were able to save investors from at least some degree of losses. The volatility of the sector was a major determinant in the level of downside protection, but the savings were significant. The Global X S&P 500 Covered Call ETF (XYLD), for example, outperformed the S&P 500 by 7%. The Global X Russell 2000 Covered Call ETF (RYLD) beat the Russell index by 6%. The Global X Nasdaq 100 Covered Call ETF (QYLD) bested the Nasdaq 100 by a whopping 14%.

Even more than the outperformance, the biggest selling point of covered call ETFs has been their yields. Higher market volatility means higher option premiums and that's something that covered call ETFs have been able to take advantage of in 2022. Over much of the 2010s, dividend yields in the 8% range were the norm. In 2022, yields of 12% have become common (even as high as 15-16% on a backward-looking basis). Even though Treasuries are now yielding around 4% on many points of the curve, double digit yields from covered call strategies still look awfully attractive.

The downside, of course, is that they don't work in every market. Covered call strategies usually outperform in down markets, but they're likely to still post negative returns overall. They'll often post positive returns in up markets, but usually lag their benchmark index due to the capped upside of the written option contracts. The only market where they really have a decent chance of both outperforming and posting positive returns is in sideways markets. Those tend to be infrequent, so investors really need to understand the benefits and drawbacks of these strategies. Those high yields come with a tradeoff.

Even with that being said, 12% yields are difficult to ignore, especially considering you don't have to venture far out on the risk spectrum to capture them. For income seekers or retirees, the predictable level of high income (in many cases on a monthly basis) is very attractive for those looking to live off of their portfolios. You may not want to make covered call ETFs the centerpiece of your investing strategy, but they can certainly augment the yield potential of a broader portfolio.

Ranking The High Covered Call ETFs

The variety of ETF choices makes distinguishing the best from the rest a little challenging. You've probably heard most financial pundits talk about focusing on funds with low expense ratios. That can certainly be a big factor in deciding which ETF to go with (it's probably the most important factor, in my view), but there are a lot of things that could go into making the right choice.

That's where I'm going to try to make things easier for you. Using a methodology that I've developed, which takes into account many of the factors that should be considered and weighting them according to their perceived level of importance, we can rank the universe of available ETFs in order to help identify the best of the best for your portfolio.

Now, this certainly won't be a perfect ranking. The data, of course, will be objective, but judging what's more important is very subjective. I'm simply going off of my years of experience in the ETF space in helping investors craft smart, cost-efficient portfolios.

Methodology & Factors For Ranking ETFs

Before we dive in, let's establish a few ground rules.

First, all of the data is used is coming from ETF Action. They have gone through the ETF universe to identify and categorize those ETFs used here. There are many that qualify and we'll be using their categorization as a starting point. Many thanks to them for opening up their vast database for my use.

Second, let's run down the factors I used in the ranking methodology.

  • Expense Ratio - This is perhaps the most important factor since it's the one thing investors can control. If you choose a fund that charges 0.1% per year over a fund that charges 1%, you're automatically coming out ahead by 0.9% annually. You can't control what a fund returns, but you can control what you pay for the portfolio. Lower expense ratios equal more money in your pocket.
  • Spreads - This relates to how cheaply you can buy and sell shares. Generally speaking, the larger the fund, the lower the spreads. Bigger funds usually have many buyers and sellers. Therefore, it's easier to find shares to transact and that makes them cheaper to trade. On the other hand, small funds tend to trade fewer shares and investors often need to pay a premium to buy and sell. Considering expense ratios and spreads together usually give you a better idea of the total cost of ownership.
  • Diversification - Generally speaking, the broader a portfolio is, the better chance it has at reducing overall risk. A fund, such as the Energy Select Sector SPDR ETF (XLE), provides a good example. 45% of the fund's total assets go to just two stocks - ExxonMobil and Chevron. By buying XLE, you're putting a lot of faith in just those two companies. An equal-weighted fund, such as the Invesco S&P 500 Equal Weight Energy ETF (RYE), would score higher on diversification than XLE.
  • FactSet ETF Scores - FactSet calculates its own proprietary ETF ranking for efficiency, tradeability and fit. They basically are designed to tell us if an ETF is doing what it sets out to do. I'm not going to copy and paste that work that they're doing, but there is some influence there to make sure my rankings are on the right path.

There are a few other minor factors thrown into the mix, but these are the main factors considered.

One thing that is not considered is historical returns. Most ETFs are passively-managed and are simply trying to track an index, not outperform. ETFs shouldn't be penalized for low returns simply because the index they're tracking is out of favor at the moment.

I'm ranking ETFs based on more basic structural factors. Are they cheap to own? Are they liquid? Do they minimize trading costs? Do they maintain risk-reducing diversification benefits?

Being in the bottom half of the list doesn't automatically make a fund "bad". It simply means that due to a low asset base, a high expense ratio, a concentrated portfolio or some other factor, it poses additional costs or downside risks.

Best High Yield Covered Call ETF Rankings

Global X has the covered call ETF market cornered. It currently offers 7 different funds accounting for well over 90% of assets in this group (it's worth noting that there are 5 fixed income buy-write funds that were just launched in August, but we'll separate those for now). The primary differences between each of these ETFs is 1) the market they cover and 2) the options overlay percentage.

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The three ETFs I mentioned above - RYLD, QYLD and XYLD - claim the top 3 spots with the Global X Russell 2000 Covered Call ETF (RYLD) landing at #1. The reason here is pretty clear - cost. Even though the expense ratios are comparable to other funds in this category (and an identical 0.60% of all the Global X ETFs), trading spreads are much smaller due to their size. In most cases, trading costs are only 10-20% of what you'd pay to trade any other covered call ETF. Those numbers matter for investors and pushes these three ETFs into a tier of their own. All three of these funds use a 100% options overlay, meaning they write covered calls on top of the entire portfolio of assets. That puts them into the highest yield category, but also limits most share price growth potential.

The other big three Global X ETFs in this category use only a 50% options overlay. This provides a middle ground between investing in the three ETFs listed above and their underlying indexes directly. They still offer a relatively high yield, but allow for the opportunity for share price appreciation as well. The Global X S&P 500 Covered Call & Growth ETF (XYLG), the Global X Nasdaq 100 Covered Call & Growth ETF (QYLG) and the Global X Russell 2000 Covered Call & Growth ETF (RYLG) are all relatively new, especially RYLG, but have still only managed about $100 million in assets combined. Investors in this category pretty much want the highest yield possible or nothing.

The other big noteworthy fund in this category is the FT Cboe Vest S&P 500 Dividend Aristocrats Target Income ETF (KNG). This ETF has two components. The first is the underlying equity component, which consists of an equal-weighted portfolio of the S&P 500's dividend aristocrats (it's essentially a replica of the ProShares S&P 500 Dividend Aristocrats ETF (NOBL)). The second is the income component, which is a series of rolling written call options on each of the aristocrat stocks. The overall goal is to generate a yield that is 3% above that offered by the S&P 500. Historically, that gap has been closer to 2.5% than 3%, but its overall yield of around 4% currently offers an interesting option for investors to consider.

The Invesco S&P 500 BuyWrite ETF (PBP) utilizes a fairly standard covered call strategy on top of the entire index, but it doesn't do much from a pure yield standpoint. On a total return basis, PBP generally performs about in line with XYLG, but its yield of less than 2% won't entice income seekers.

The NEOS S&P 500 High Income ETF (SPYI) is one of the newest funds in this category, but has yet to gain any real traction. Its monthly distribution schedule and current 12% annualized yield are attractive and it's unique in that it uses both purchased and sold call options in order to offer a high yield and upside potential.

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