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Search For Income: S&P 500 Covered Call ETFs

Aug. 02, 2021 8:25 AM ETDIVO, KNG, PBP, SIXH, XYLD26 Comments
Brad Kenagy profile picture
Brad Kenagy


  • In searching for income, I researched the five largest S&P 500 covered call ETFs.
  • The dividend yields of the five funds ranged from 1.09% to 9.85%.
  • After examining the data, I determined that DIVO was the most attractive ETF in the group.

ETF Exchange Traded Fund , business, finance conceptual.
Vadzim Kushniarou/iStock via Getty Images

In this article, I will be conducting an overview of ETFs that employ a covered call strategy for the S&P 500 (SPY). For those that are new to options, a covered call strategy involves owning a stock and then selling

This article was written by

Brad Kenagy profile picture
-I have been investing since the fall of 2008 and invested through one of the most difficult investing periods in history and know the importance of dividend growth and stability during those times as well as during the good times. I started writing for Seeking Alpha at the end of 2011 and I have been successful with the companies I write about, which is shown by my high TipRanks success rate (Link Below). https://www.tipranks.com/bloggers/brad-kenagy

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in DIVO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications or other transaction costs, which may significantly affect the economic consequences of a given strategy. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (26)

Gould Capital profile picture
I own XYLD of the ETFs you listed. DIVO is interesting, but I have no position in it at this time.

I also own the S&P500 Covered Call CEF SPXX. Comparing to the metrics in the article, SPXX yields 5.51%, YTD the share price is up 16.80% (that's not counting the dividend, total return would be higher), and the Expense Ratio is 0.93%.

SPXX sells covered calls on roughly 50% of its portfolio, so the upside is not as limited, such as in the case of XYLD, which per Global X website, "Sells ATM Covered Calls (on 100% of assets) 100% of the upside is forfeited."

Again, long both XYLD and SPXX, I see XYLD as pure income, and SPXX as a hybrid of both income and capital appreciation.
Rainy Decade Investing profile picture
Covered call strategies cause complete loss of capital over time: they capture all of the market loss, and give away most of the upside. Chris Cole has modelled this over the last 100 years. See his work supporting the Dragon portfolio at artemiscm.com.

Alternatives for yield might include $SYLD, $FYLD, and $EYLD. EYLD gets you emerging market exposure at about half the P/E ratio of the US, and a 5% yield in the bargain. I own a small stake of each of those 3 myself.
Monthly Income Investor profile picture
@Rainy Decade Investing so what your saying is, QYLD will eventually fall to $0?
Rainy Decade Investing profile picture
@Monthly Income Investor That is what Chris Cole's research says, yes.

If I graph QYLD and compare to QQQ, they both got crushed in Feb-Mar 2020. QQQ then recovered, and QYLD did too, but it fell further and further behind.
Monthly Income Investor profile picture
@Rainy Decade Investing I cant find any info where he talks about covered calls. Feel free to send me a link. If QYLD goes to zero, so does QQQ, so that would probably be a little concerning.... but I would enjoy reading his thoughts :)
Still not sure what a covered call etf brings compared to a normal s&p 500 etf. Yes it pays more “monthly” income, but at a higher expense, downside is not reduce and upside clearly capped. Why not invest in normal etf and sell some shares periodically if you need the income?
Brad Kenagy profile picture
@Tim.DC Tim, Thank you for the comment. Regarding your question: "Why not invest in normal etf and sell some shares periodically if you need the income?"

Answer: Most likely is personal preference and for tax reasons (capital gains)
Abusultan profile picture
I am surprised that you sold MRK very quickly. If the business is still good and the fundamental the same, I wouldn't sell it quickly because it underperform the index.
Brad Kenagy profile picture
@Abusultan Purchased shares of MRK in three tranches over the past year and a half and the stock has done nothing. My Cost basis on those purchases was $77.22 and I sold recently for $77.24. So broke even on that but I also collected 6 dividend payments. My purchases were made Feb 2020, March 2020 and February 2021
Shmuel Ben-Ari profile picture
Did you take a look at $JEPI?
Brad Kenagy profile picture
@Shmuel Ben-Yehuda Thank you for the comment. JEPI uses ELNs (Equity Linked Notes) and that is not like a regular covered call ETF so didn't include it. But forgot to mention that I didn't include it in my article.
Shmuel Ben-Ari profile picture
@Brad Kenagy Wouldn't $JEPI achieve your stated goal of income + price appreciation?
Brad Kenagy profile picture
@Shmuel Ben-Yehuda Thank you for the comment. Possibly, but as I noted JEPI uses ELNs and I am not a fan of those of ETNs.
Thanks for the article. However the following sentence is incomplete "The only other difference I could find is that in the PBP prospectus, it states and there is no mention of reinvestment in the XYLD prospectus."
Brad Kenagy profile picture
@jeffrg That you for spotting, I just submitted a correction for that sentence.
Monthly Income Investor profile picture
Great easy to read article! I am planning to start adding some dividend etfs to go with my CEFS. DIV0 is looking better and better!
Brad Kenagy profile picture
@Monthly Income Investor Thank you glad you enjoyed the article and the information.
Retired Investor profile picture
@Monthly Income Investor Agree $DIVO is my choice. I recently covered by itself and against $DGRO.
Monthly Income Investor profile picture
@Retired Investor Yes i read your article the other day. I loved the graph where it showed it would take until 2060 for dgro to catch up to the yield of divo :) Very informative article!
dundey profile picture
I own XYLD and have been happy with it.
Brad Kenagy profile picture
@dundey Thank you for sharing your experience with XYLD.
hawkrnc_19 profile picture
Excellent summary.
Brad Kenagy profile picture
@hawkrnc_19 Thank you, glad you found the information useful.
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