How to Choose the Best Covered Call ETFs

Covered call ETFs like JPMorgan Equity Premium Income ETF (JEPI) and the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) have surged in popularity in recent years, and for good reason. Their attractive yields and downside cushion have made them a favorite for income-seeking investors, especially in volatile or sideways markets. 

But their rise has sparked a wave of similar exchange-traded funds, including a fast-growing number of single-stock covered call funds, making it harder for investors to know which fund is the right fit.

In this article, we’ll explain how covered call ETFs work, what types are available, what to look for when choosing one, and who should (and shouldn’t) use them in a portfolio.

How Covered Call ETFs Work: Pros and Cons

Covered call ETFs generate income by writing (selling) call options on the stocks they own. This options premium becomes income for the fund and its shareholders. The trade-off? The fund gives up some or all of the stock’s upside potential above the option’s strike price.

It's worth noting that some covered call ETFs, such as JEPI and JEPQ, are active ETFs that use covered calls as only a portion of their strategy.

When Covered Call ETFs Perform Well

• In flat or range-bound markets, when call options expire worthless and the ETF keeps the premium.
• During mild uptrends, when premiums add to moderate capital gains.
• In volatile markets, which boost option premiums and yield.

When They Can Lag

• In strong bull markets, as upside gains are capped.
• During sharp downturns, since they still hold stocks that can lose value, and option premiums may not offset losses.

Types of Covered Call ETFs: Which One Matches Your Goals?

There are now dozens of covered call ETFs, and they differ in structure, underlying holdings, and how options are written. Here are the main categories:

Broad-Market Covered Call ETFs

• Examples: JEPI, QYLD, XYLD
• Invest in large indexes, like the S&P 500 or Nasdaq-100
• Offer steady income and broader diversification
• Are suitable for conservative income-seeking investors

Style-Specific Covered Call ETFs

• Examples: RYLD for Russell 2000), and XYLG for S&P 500
• Focus on sectors or styles like growth, small-cap or tech
• Typically offer higher yields but with more volatility
• Are better for investors looking to boost income from a particular sector

Single-Stock Covered Call ETFs

• Examples: NVDY for Nvidia Corp. (NVDA) and MSTY for MicroStrategy Inc. (MSTR).
• Sell calls on individual megacap stocks
• Offer eye-catching yields (sometimes 40% or more)
• High risk due to concentration in a single stock
• Suitable only for experienced traders or short-term tactical plays

Aggressive Yield-Focused ETFs

• Examples: QYLD and RYLD
• Write calls on nearly 100% of holdings
• Highest income potential, but caps all upside
• Best in flat or declining markets—not ideal for long-term growth

List of Top Covered Call ETFs

Source: etf.com, data from FactSet as of July 23, 2025. Past performance is no guarantee of future results.

What to Look for in a Covered Call ETF

With so many options, it’s important to evaluate more than just the yield. What's the source of the income and how well does the fund mitigate downside risk? Here are some key factors to consider:

• Yield Source: Is the yield from sustainable premiums or short-term trades? High yields aren’t always reliable.
• Underlying Index or Stocks: Does the ETF hold diversified names like JEPI or just one company like NVDY?
• Call Coverage: Does the ETF write calls on all or a portion of its holdings? Partial coverage allows more upside.
• Expense Ratio: Covered call ETFs tend to be more expensive than traditional equity ETFs, so check their costs.
• Liquidity: Look for funds with high average volume and significant assets under management (AUM).
• Distribution History: Are payouts stable over time, or do they fluctuate?
• Tax Considerations: Option income is often taxed as short-term gains, consider holding in a tax-deferred account.

While covered call ETFs don’t offer true downside protection like buffer ETFs, some actively managed covered call ETFs (like JEPI) attempt to mitigate downside risk by holding lower-volatility stocks. To analyze downside mitigation, review recent market performance during market downturns, such as April 2025, when the stock market declined sharply. 

Who Should (and Shouldn’t) Use Covered Call ETFs

Covered call ETFs may be right for:

• Income-focused investors seeking monthly distributions
• Retirees looking for lower-volatility equity income
• Investors expecting sideways or volatile markets
• Traders looking for short-term plays in single-stock ETFs

They may not be right for:

• Growth-focused investors with long time horizons
• Investors unwilling to cap upside in bull markets
• Those who don’t understand options or risk profiles
• Anyone concentrated in equities and looking for true diversification

The Bottom Line

Covered call ETFs can be powerful tools for generating income, especially in volatile markets, but they’re not one-size-fits-all. From diversified funds like JEPI to concentrated single-stock ETFs like the YieldMax TSLA Option Income Strategy ETF (TSLY), the right choice depends on your risk tolerance, income needs, and market outlook.

Before investing, ask yourself what trade-offs you’re willing to make and how these funds fit within your overall portfolio. Whether you’re looking to smooth returns, enhance yield, or add tactical exposure, choosing the best covered call ETF starts with understanding how they work and what you expect them to do for you.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investing in ETFs involves risks, and investors should carefully consider their investment objectives and risk tolerance before making any investment decisions.

At the time of publication, Kent Thune did not hold a position in any of the aforementioned securities.