Covered Call ETFs Decoded: Why These Income Funds Deliver 8% to 89% Yields

For income-focused investors, covered call strategies represent a compelling opportunity across different market conditions. Whether equities rally, decline, or trade sideways, the mechanics of selling calls generate consistent returns. Multiple exchange-traded funds now execute this strategy automatically, eliminating the need for individual traders to handle the complex options work themselves.

Understanding the Covered Call Mechanism

The foundation of this income generation method rests on a straightforward principle: selling call options on stocks you already own. When you write a covered call, you’re selling another investor the right to purchase your shares at a predetermined price within a specific timeframe. In exchange, you receive an immediate premium payment.

This creates a win-win scenario for income investors. If the stock price remains below the strike price, you keep both your shares and the premium collected. Should the stock appreciate and the call gets exercised, you sell at a predetermined profit while still keeping the premium. Either outcome generates income, which explains why covered call funds have gained traction among yield-seekers.

Evaluating Four Notable Covered Call Funds

FT Vest Rising Dividend Achievers Target Income ETF (RDVI) – 8.2% Yield

RDVI combines two income layers: dividend growth investing plus covered call writing. The fund targets companies with consistent dividend expansion over recent years, then sells calls against S&P 500 positions to enhance returns. This dual-strategy approach theoretically provides diversification, though recent performance suggests the covered call overlay hasn’t delivered meaningful differentiation from its underlying dividend growth index.

FT Energy Income Partners Enhanced Income ETF (EIPI) – 7.3% Yield

Unlike most covered call funds that use broad indexes, EIPI takes a sector-focused approach within energy stocks. Since launching in 2024, this actively-managed strategy has sold individual call options on holdings like Enterprise Products Partners (EPD), Kinder Morgan (KMI), and Exxon Mobil (XOM), rather than relying on index-level options. The fund’s portfolio includes approximately 50 options positions simultaneously. Notably, EIPI has outperformed its energy sector benchmark while delivering smoother volatility-adjusted returns—a promising signal for sector-specific covered call strategies.

Global X Russell 2000 Covered Call ETF (RYLD) – 12.1% Yield

RYLD applies covered call writing to small-cap equities through the Russell 2000 index. The logic is sound: smaller companies exhibit higher volatility, which translates to higher option premiums and greater income potential. In execution, however, RYLD has struggled to justify its management approach. The fund systematically underperforms its underlying index by a wide margin, capturing limited upside when small caps surge while delivering the expected downside protection during corrections.

YieldMax NVDA Option Income Strategy (NVDY) – 88.9% Yield

The most striking offering is NVDY, which holds NVIDIA (NVDA) shares while selling covered calls and implementing call spreads. This multi-layered options approach generates a near-90% annual yield—exceptional on the surface but concerning in practice. NVDY consistently underperforms NVDA itself, meaning shareholders sacrifice significant capital appreciation for yield generation. This strategy’s sustainability hinges entirely on NVIDIA maintaining its upward trajectory; any deceleration could dramatically impair returns.

When Covered Call Funds Disappoint

The persistent challenge with covered call ETFs stems from their structural constraint: as businesses dependent on options trading volume, they must continually execute trades regardless of market conditions. This forced trading creates recurring problems:

• Called-away positions force reinvestment decisions and trigger taxable events, potentially creating substantial year-end tax liabilities
• Poorly-timed strikes on short-selling strategies can result in forced purchases of unwanted shares at unfavorable prices during volatile market swings

The Case for Nasdaq 100 Covered Call Strategies

Interestingly, covered call strategies applied to the Nasdaq 100—technology and growth-oriented equities—could theoretically offer compelling opportunities given the sector’s volatility profile. Yet the current covered call ETF landscape lacks a clearly dominant Nasdaq 100 covered call option with both strong performance and reasonable cost structure.

The Bottom Line

Covered call funds excel at generating current income, but investors must scrutinize the fine print. Some funds, particularly EIPI, have demonstrated that active management and sector specialization can outperform. Others, like RYLD, struggle to justify their overhead. The highest-yielding options like NVDY come with a hidden cost: significant opportunity cost if the underlying asset appreciates sharply. Income investors should evaluate covered call funds not solely on headline yields, but on risk-adjusted returns relative to their benchmarks.