Many analysts are predicting we won’t see a bull or a bear market this year. Instead, stocks could remain unpredictable, moving up and down in a trading range and ultimately delivering flat returns. In this sideways market, there’s an equity tool that still allows income-oriented investors to make money—“covered call” stock ETFs. Trade-off: You miss out on a chunk of the upside if the stock market rises…get some downside protection if it falls…and receive big, steady dividends no matter what happens.

How it works: The ETF invests in stocks that track a popular index such as the S&P 500, then sells call options on those stocks. A call option is a short-term contract giving a buyer the right to purchase an asset at a specific price (known as the “strike” price) by a specific date. When the fund sells the option, it receives an immediate cash payment that is distributed to shareholders.

Covered call ETFs work best if stocks don’t fluctuate much in either direction. Reason: If a stock in the ETF rises way above its strike price, the ETF still is obligated to sell it to the buyer at the agreed-upon price and the ETF’s performance likely will trail that of conventional stock funds. If a stock in the ETF plunges far below the strike price, the buyer will let the option expire and the ETF will continue to own it. The cash dividend you receive helps, but it may not make up for all of the ETF’s losses. Covered call ETFs worth considering now…

Global X S&P 500 Covered Call & Growth ETF (XYLG). 12-month rolling dividend yield: 5.7%.

Global X Nasdaq 100 Covered Call ETF (QYLD). 12-month rolling dividend yield: 11.83%.

JPMorgan Equity Premium Income ETF (JEPI). Actively managed ETF with 135 high-quality stocks. 12-month rolling dividend yield: 11.26%.

Related Articles