Skip to main content

Top 7 High Yield Covered Call ETFs For 2022

Covered call strategies can offer yields of 10% or higher right now.

While fixed income yields have been rising to start 2022, it's largely still a yield-less world out there. Only the longest duration Treasuries are yielding more than 2% and the S&P 500 is only at about 1.2%. If you want to venture much further out on to the risk spectrum, say, junk bonds or high yield equities, you could probably get somewhere in the 3-4% range, but beyond that requires taking some significant risks.

With the Fed looking to tighten policy over the next 12 months and the economy figuring to slow throughout the year, it's not necessarily a good time to be adding risk to portfolios. As I've noted previously over the past month or so, 2022 should probably include a focus on capital preservation over return maximization. Valuations have gotten about as stretched as can be reasonably justified. There's been enough liquidity floating around to support the balance sheets of just about any business. The ultra-loose conditions that both companies and investors have grown used to are about to come to an end. Investors should also begin resetting their expectations.

Note: Interested in getting periodic e-mail notifications when articles are published here? Drop your e-mail in the box below!

Covered calls can be a great way to maximize yield when conditions aren't exactly favoring more share price gains. Those high yields, of course, come with a tradeoff. Investors who write calls capture the income from options premiums, but end up giving up a lot of capital growth upside (the shares get called away as they're appreciating). If you're expecting a sideways or even modestly declining market, covered call strategies can be a way of outperforming on a total return basis or just earning a potentially double digit yield.

The ETF industry offers more than a dozen different funds using covered call strategies. Global X is by far the biggest issuer of these products, but several fund companies have jumped in to offer some relatively unique strategies that could prove to be beneficial to investors in 2022.

Here are 7 high-yielding covered call ETFs to consider in 2022.

Global X Nasdaq 100 Covered Call ETF (QYLD)

Screen Shot 2022-01-17 at 8.55.32 AM

QYLD is easily the largest covered call ETF out there, which shouldn't be surprising given that it uses the Nasdaq 100 as its core index. The fund's strategy is very straightforward - it buys all individual index components in the same weighting to effectively mimic the Nasdaq 100 and then writes a series of at-the-money on 100% of the portfolio's assets in order to maximize income.

Here's the upside. QYLD currently yields more than 12%, making it one of the highest yielding ETF choices out there. It also pays dividends on a monthly basis, making it incredibly convenient for investors looking to live off of their portfolio income.

Here's the downside. Because options are written over 100% of the portfolio, you're essentially giving up most if not all capital growth upside. That's easy to see looking at the chart above where the share price has peaked around the $23-24 level even as the Nasdaq 100 has pushed to new highs.

If you're a believer that the Nasdaq 100 is moving sideways or even slightly down over the next 12 months, QYLD could be a nice option for investors.

Global X S&P 500 Covered Call ETF (XYLD)

Screen Shot 2022-01-17 at 8.55.49 AM

XYLD is effectively the same as QYLD, except it uses the S&P 500 as its core index instead of the S&P 500. It currently yields a comparatively more modest 8%. That could be expected since the S&P 500 is generally considered less volatile that the S&P 500 and lower volatility tends to equate to lower option premiums.

XYLD has been a little unusual in that it's been able to capture share price gains in addition to the high yield. The market environment coming out of the COVID recession has been unusual to say the least and I wouldn't expect this trend to continue since it also uses a 100% option overlay. Overall, even though the yield is lower, XYLD could be preferable to QYLD if you want a little less tech exposure in your portfolio.

Global X Russell 2000 Covered Call ETF (RYLD)

Screen Shot 2022-01-17 at 8.56.08 AM

Let's round this out with Global X's covered call ETF using small-caps instead of large-caps. RYLD is the only ETF out there writing call options over a small-cap portfolio, so it's a bit of a unicorn. Its 12% yield is more in line with QYLD than XYLD for the reasons mentioned already - higher risk levels tend to come with higher income premiums.

As we've already seen over the past month or two, that risk can be a problem. Small-caps have been declining and RYLD has declined with it. The yield is certainly attractive, but these covered call ETFs can experience share price declines along with their indexes under the wrong conditions. Look no further than the 1st quarter of 2020 to see what can potentially happen.

Amplify CWP Enhanced Dividend Income ETF (DIVO)

Screen Shot 2022-01-17 at 8.56.28 AM

DIVO is unique in both how it takes a quality approach to portfolio construction and uses a tactical strategy to determine where and how to write call options on the portfolio. The fact that it's actively managed also provides an advantage in that it allows the management team to pivot quickly should conditions change.

DIVO's portfolio consists of roughly 20-25 stocks that have histories of both dividend and earnings growth and are adjusted according to market cap, management track record, earnings, cash flow and return on equity. On top of that portfolio, covered calls are written against individual stock positions on a tactical basis looking for the most attractive opportunities. DIVO aims to deliver a yield of between 4-7%, which is a combination of dividend income and options premiums. As of the latest semi-annual update, DIVO had options written against just two stocks - Apple and Nike. It has a distribution yield of nearly 5%.

FT CBOE Vest S&P 500 Dividend Aristocrats Target Income ETF (KNG)

Screen Shot 2022-01-17 at 8.57.05 AM

KNG is an interesting option if you're interested in using dividend growth stocks as a key part of your income strategy. This fund starts with an equal-weighted portfolio of the stocks contained in the S&P 500 Dividend Aristocrats Index and then issues a rolling series of written call options on each of the aristocrat stocks. Its primary objective is generating an annualized income from stock dividends and option premiums that is approximately 3% over the annual dividend yield of the S&P 500. As of right now, it's coming a little short of that goal, offering a distribution yield of around 3.6%. This is a nice option for capturing a much higher yield from a very popular investment strategy.

Invesco S&P 500 BuyWrite ETF (PBP)

Screen Shot 2022-01-17 at 8.57.26 AM

PBP is essentially Invesco's version of XYLD. It also lays a covered call writing strategy over the entire portfolio. The only major difference I see is that PBP will write options with strikes prices "at or above" the prevailing S&P 500 prices, where XYLD targets at-the-money options contracts specifically. That difference could account for why XYLD yields 8% and PBP yields closer to 6%. The difference, though, has allowed PBP to capture somewhat higher share price returns over the past couple of years as well.

Global X Nasdaq 100 Covered Call & Growth ETF (QYLG)

Screen Shot 2022-01-17 at 8.57.45 AM

QYLG is interesting in that allows for more share price growth potential in exchange for a lower yield. Whereas QYLD writes options over 100% of the portfolio, QYLG writes them over just 50%. Its current forward-looking distribution rate is around 6%, roughly half that of QYLD. QYLG as well as the Global X S&P 500 Covered Call & Growth ETF (XYLG) offer nice middle grounds between the underlying index outright and investing in a full-out covered call strategy.

Note: Interested in getting periodic e-mail notifications when articles are published here? Drop your e-mail in the box below!

Read More…

Top 5 Cloud Computing ETFs For 2022

The ARK ETFs Are Getting Pummeled, But This One Still Looks Interesting

This ETF Is Making QQQ Irrelevant

The Fed Has Been Playing With Fire. Now, It's Getting Burned

Worst Performing ETFs For 2021

Top Performing Dividend ETFs For 2021

Top Performing ETFs For 2021

Top 7 Dividend ETF Picks For 2022