How Covered Call ETFs Evolved Through the Years

Era One: From Systematic to Tactical Covered Call Selling

The biggest weakness of early covered call ETFs was how mechanically they sold options. Writing at-the-money calls against 100% of an underlying portfolio certainly maximizes current option premium, but it also creates a difficult long-term payoff profile.

An at-the-money call has a strike price roughly equal to the current price of the underlying asset. Because there is a high probability that the option will finish in-the-money, these contracts command relatively rich premiums. The trade-off is that practically any appreciation above the strike price gets surrendered to the option buyer.

Overwrite 100% of the portfolio and that problem becomes even more pronounced. Investors retain most of the downside exposure to the stocks they own while leaving themselves very little room to participate in a rally. For this type of strategy to work particularly well, the option premiums collected need to adequately compensate for the upside surrendered and downside retained.

Part of that relies on implied volatility consistently exceeding subsequently realized volatility, allowing the option seller to harvest the difference. That can work during sideways or choppy markets, but it becomes a substantial handicap during persistent bull markets.

One ETF that helped move the category beyond this mechanical approach was the Amplify CWP Enhanced Dividend Income ETF

. Launched in December 2016, DIVO has since grown to more than $7.8 billion in assets under management and remains managed by Kevin Simpson and the team at subadvisor Capital Wealth Planning.

On the equity side, DIVO actively selects a relatively concentrated portfolio of high-quality large-cap companies. Its managers evaluate characteristics such as dividend growth, earnings strength, free cash flow generation, return on equity, and management track record.

The options strategy is equally selective. Rather than continuously overwriting the entire portfolio, DIVO sells covered calls tactically on individual holdings. For example, the managers may choose to write calls ahead of an earnings announcement, when elevated implied volatility can increase premiums.

Just as importantly, the managers aren't forced to sell at-the-money calls every month. They can decide which stocks to overwrite, when to do it, and where to set the strike price. That gives DIVO considerably more flexibility to preserve upside participation when the managers believe it is worthwhile.

The results have been encouraging. From its December 2016 inception through July 31, 2026, DIVO delivered a 12.64% annualized total return. That still trails the S&P 500 Total Return Index at 15.07% over the same period, but the gap is considerably narrower than what investors experienced with earlier mechanical buy-write strategies. DIVO has also held up well on a risk-adjusted basis and substantially outperformed traditional Cboe buy-write benchmarks.

Income-focused investors sometimes overlook DIVO because its current 4.82% distribution rate appears modest compared with the double-digit yields advertised by many newer covered call ETFs. But distribution yield alone doesn't determine whether an investment has been successful. Total return ultimately matters, particularly when distributions are being reinvested.

DIVO demonstrates that point well. Despite charging a higher 0.56% expense ratio, its more selective approach has historically produced substantially stronger total returns than first-generation strategies such as PBP and similar competitors from the likes of Global X ETFs.

DIVO’s success has since helped establish a broader family of actively managed covered call ETFs at Amplify. These include the Amplify CWP International Enhanced Dividend Income ETF

, which applies a similar strategy overseas, and the more aggressive Amplify CWP Growth & Income ETF

QDVO

, which shifts the underlying equity portfolio toward companies with stronger growth characteristics.

Era Two: Equity-Linked Notes Separate the Stocks from the Options

Another limitation of traditional covered call strategies was that the options overlay generally needed to correspond with the underlying exposure. If you wanted to write covered calls on an equity portfolio, you needed sufficient shares or equivalent exposure to cover those calls. That constrained how creatively managers could combine stock selection with options income.

A major evolution arrived in May 2020 with the launch of the JPMorgan Equity Premium Income ETF

. Its use of equity-linked notes (ELNs) demonstrated that ETF managers could use structured products to obtain covered call economics without directly writing calls against the stocks held in the portfolio. Like DIVO, JEPI is actively managed.

On the equity side, lead portfolio manager Hamilton Reiner and his team select roughly 100 large-cap U.S. stocks with an emphasis on defensive characteristics and lower volatility. The resulting portfolio looks noticeably different from the S&P 500, particularly in its sector weights and reduced dependence on mega-cap technology stocks.

Yet JEPI can still monetize the generally richer volatility of the S&P 500 itself. It accomplishes this by allocating up to approximately 15% of assets to ELNs. An ELN is a structured debt instrument issued by a financial institution whose payoff is linked to another asset. In JEPI's case, these notes are structured to provide the economic characteristics of a one-month, out-of-the-money S&P 500 covered call strategy.

The combination is clever. JEPI can construct its underlying equity portfolio around lower-volatility stocks without having to sell calls directly against those same holdings. Meanwhile, the ELNs allow the fund to harvest option premiums linked to the broader and more volatile S&P 500. The defensive equity portfolio and income-generating overlay can therefore be optimized somewhat independently.

That structure proved particularly useful during the 2022 bear market. JEPI's lower-volatility stocks provided greater downside resilience than the broad market, while its ELNs continued generating income from elevated S&P 500 volatility. The strategy's popularity surged, and JEPI now manages just shy of $46 billion. Today, JEPI sports a 7.88% 30-day SEC yield while charging a competitive 0.35% expense ratio.

JPMorgan subsequently applied a similar concept to a more aggressive underlying market through the JPMorgan Nasdaq Equity Premium Income ETF

. It charges the same 0.35% expense ratio but currently offers a substantially higher 15.06% 30-day SEC yield. That difference largely reflects the higher volatility associated with Nasdaq-100 stocks, which generally translates into richer option premiums.

Era Three: Making Covered Call Income More Tax-Efficient

For all of JEPI's innovations, its use of equity-linked notes introduced another drawback: tax efficiency. Income generated through JEPI's ELNs can result in substantial distributions characterized as ordinary income. That matters particularly in taxable brokerage accounts because ordinary income can be subject to the highest federal marginal income tax rates. For high-income investors, the difference between a large headline distribution and what they actually retain after taxes can therefore be significant.

One of the biggest steps toward addressing this problem came in August 2022 with the launch of the NEOS S&P 500 High Income ETF

. This ETF owns individual stocks designed to provide exposure to the S&P 500, then supplements that portfolio with a quantitatively driven options overlay. Instead of using ELNs, however, SPYI primarily trades S&P 500 Index (SPX) options.

That distinction has important tax implications. SPX options generally qualify as Section 1256 contracts. Regardless of how long they're held, gains and losses are generally treated as 60% long-term and 40% short-term capital gains for federal tax purposes. That's potentially more favorable than having the entire amount taxed at ordinary income rates, particularly for investors in higher tax brackets.

NEOS adds another layer through active tax-loss harvesting. The managers can realize losses within the equity portfolio to offset gains generated elsewhere in the strategy while replacing sold positions with sufficiently different securities to maintain the fund's desired market exposure.

Together, Section 1256 treatment and tax-loss harvesting have allowed SPYI to deliver a substantial portion of its distributions as return of capital (ROC) rather than ordinary income. For example, SPYI's July 2026 Section 19(a) notice estimated that approximately 99% of its latest $0.53-per-share distribution represented return of capital, with only about 1% classified as net investment income.

Return of capital generally isn't immediately taxable when received. Instead, it reduces an investor's cost basis, deferring the potential tax liability until the shares are eventually sold. However. section 19(a) notices are estimates, not final tax classifications. The actual character of SPYI's distributions isn't determined until year-end and ultimately reported to investors on Form 1099-DIV.

Investors pay more for that sophistication. SPYI charges a 0.68% expense ratio and currently sports a 12.04% distribution rate. That said, its total return record has also been respectable for a covered call strategy. Since inception, SPYI has returned approximately 14.65% annually, ahead of the Cboe S&P 500 BuyWrite Monthly Index at 11.91%. However, it has still trailed the S&P 500 itself, which returned approximately 18.8% annually over the same period.

SPYI's success has since encouraged NEOS to apply the same framework elsewhere. One of the most popular examples is the NEOS Nasdaq-100 High Income ETF

, which employs a similar strategy using Nasdaq-100 Index (NDX) options. With the same 0.68% expense ratio, QQQI currently offers a higher 14.01% distribution rate, supported in part by the greater volatility of the Nasdaq-100.

Please note that this article reflects the author’s personal views and does not represent the opinions of the publication or its affiliates. It is for informational purposes only and does not constitute investment advice. It is essential to seek guidance from a registered financial professional before making any investment decisions.