Covered-Call ETFs Are Booming. But Not All Yield Is Good

The chase for higher equity yields with lower risk is boosting the popularity of covered-call ETFs.

Why it matters: More than 100 billion dollars have flowed into the funds over the last three years, according to Morningstar data. Covered-call ETFs produce higher income, but it comes at a cost. Retirees and other income investors need to be aware of the trade-offs they’re making for it. Dan Sotiroff, the editor of Morningstar’s ETFInvestor newsletter, explains the risks and rewards of covered-call ETFs.

9 Questions on Covered-Call ETFs

1. What are covered-call ETFs, and how do they work?
2. Why are retirees and other income investors drawn to these ETFs? What’s making them so popular this year?
3. Their yields look very high. What is driving them?
4. What types of trade-offs are investors making?
5. ETFs are known to be tax-efficient investments. What are the tax considerations for covered-call ETFs?
6. Should you hold covered-call ETFs in a taxable or tax-deferred account?
7. What’s the optimal retirement account to hold covered-call ETFs?
8. Let’s talk about covered-call ETF performance in 2025. What have you’ve seen?
9. Which covered-call ETFs do Morningstar analysts consider a solid choice for investors, and why?

Key Quote on Covered-Call ETFs

“If I’m young, and I’ve got the risk tolerance and everything like that, you’re better off just being in sort of a low-cost S&P 500 ETF or something like that, right, where most of your gains are going to be price appreciation, and it’s going to be a little bit riskier.

That’s the really big thing I think that most people should take away. These are not great long-term investments if you’re in that accumulation phase of your financial plan in life.”

• Daniel Sotiroff, senior manager research analyst, Morningstar Research Services

Morningstar Medalist: JP Morgan Equity Premium Income ETF JEPI stands out as a solid choice in the covered-call ecosystem, says Sotiroff. The well-known ETF has earned a Morningstar Medalist Rating of Bronze. Its expense ratio is 35 basis points, which is cheaper than 92% of ETFs in the derivative income category. Hamilton Reiner, the fund’s manager, builds a strategy around S&P 500 stocks to create a diversified and defensive stock portfolio.

More From Morningstar on Covered-Call ETFs

The appeal of higher income and yield is drawing some investors away from bond and dividend funds. Sotiroff believes that’s why covered-call ETFs’ popularity is growing. The editor of Morningstar’s ETFInvestor newsletter pits bond, dividend, and covered-call ETFs against each other.

Lan Anh Tran, manager research analyst for Morningstar Research Services, examines whether investors should own a covered-call ETF like JP Morgan Equity Premium Income ETF. Watch and decide if the pros outweigh the cons when it comes to covered-call and buffer ETFs. And finally, check out 3 Great ETFs for Jittery Markets for low-volatility investment ideas.