Tracking the rising stock yields has increased interest in covered call ETFs, primarily because they present a lower risk alternative.
Why is this important? According to Morningstar data, these funds have seen over $100 billion in investments over the last three years. Covered call ETFs offer higher income potential, but there are trade-offs to consider. Those in retirement or those seeking income should be mindful of these factors. Dan Sotyrov, an editor at Morningstar’s etfinvestor, sheds light on the risks and benefits associated with these investments.
9 questions about covered call ETFs
- What exactly are covered call ETFs, and how do they function?
- What draws retirees and income investors to these ETFs? Why the surge in popularity this year?
- The income they generate looks impressive. What factors contribute to that?
- What compromises do investors need to consider?
- Considering their tax efficiency, what should one know about the tax implications of covered call ETFs?
- Should I hold a covered call ETF in a taxable or a tax-deferred account?
- What is the optimal account type for holding a covered call ETF?
- How did covered call ETFs perform in 2025? What observations were made?
- A Morningstar analyst sees it as a strong option for investors—what’s the reasoning?
Key Quotes on Covered Call ETFs
“If I’m young and can tolerate risk, most of your profits will really come from price appreciation, which carries more risk.”
“That’s crucial for many to understand. If you’re in the accumulation phase of financial planning, these aren’t intended for long-term hold.”
- Daniel Sotyrov, senior manager research analyst at Morningstar Research Services
Morning Star Medalist: The JP Morgan Equity Premium Income ETF (JEPI) is highlighted as a strong contender in the covered call space, according to Sotyrov. This ETF has received a bronze rating from Morningstar medalists, with an expense ratio of just 35 basis points, making it more affordable than 92% of its peers in the derivative income category. Fund manager Hamilton Reiner aims to develop a strategy focused on S&P 500 stocks, creating a diversified and defensive portfolio.
Additional Insights from Morningstar on Covered Call ETFs
The lure of higher income has drawn some investors away from traditional bonds and dividend funds. Sotyrov believes this shift contributes to the growing popularity of covered call ETFs. The Etfinvestor newsletter compares bonds, dividends, and covered call ETFs.
Lan Anh Tran, a manager research analyst at Morningstar Research Services, will evaluate the necessity of owning a covered call ETF like the JP Morgan Equity Premium Income ETF. The team will assess whether the benefits of covered calls and buffer ETFs outweigh their downsides, especially for those exploring volatile investments.
