Key Points in This Article:
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Covered call ETFs generate high yields by selling call options, but differ from traditional ETFs by capping upside potential in exchange for premium income.
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NAV is a critical metric for assessing the sustainability of dividends, as a declining NAV can lead to reduced premiums and eroded capital.
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High yields must be balanced with risk, as focusing solely on income without considering NAV growth can lead to long-term losses.
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Covered call exchange-traded-funds (ETFs) have become a popular choice for income-seeking investors, offering high dividend yields by selling call options on their underlying assets.
Unlike traditional ETFs, which primarily track an index or sector to provide capital appreciation or modest dividends, covered call ETFs generate enhanced income by writing call options against their holdings. This strategy caps some upside potential in exchange for premium income, which is distributed as dividends.
However, high yields can be misleading, and chasing them without scrutiny can lead to losses. The sustainability of these payouts hinges on the ETF’s ability to maintain or grow its net asset value (NAV) over time. While the allure of double-digit yields is strong, investors must look beyond surface-level returns to assess the fund’s health and long-term viability, ensuring the strategy doesn’t erode the underlying capital.
With markets facing volatility in 2025, selecting the right covered call ETF is critical for balancing income and stability.
The Importance of NAV in Covered Call ETFs
Net Asset Value (NAV) is a critical metric for evaluating covered call ETFs, as it represents the per-share value of the fund’s assets minus liabilities. A growing NAV indicates the fund is preserving or increasing its capital base, which is essential for sustaining high dividend payouts.
When an ETF sells call options, it collects premiums that boost yields, but if the underlying assets decline significantly, the NAV shrinks. A declining NAV reduces the assets available to write calls against, leading to lower premiums and, ultimately, smaller dividends — a phenomenon known as “NAV bleed.” This erosion can prevent the ETF from recovering during market rallies, as the capped upside from call options limits gains.
A rising NAV, conversely, supports larger premiums and future dividends while offering some participation in market upswings. Of the many covered call ETFs available, only about 40% have grown their NAV since inception. This highlights the risk of focusing solely on yield without considering NAV sustainability.
The Best High Yield Covered Call ETF?
The NEOS Bitcoin High Income ETF (CBOE:BTCI) stands out with an eye-popping 22% dividend yield, driven by its unique strategy of leveraging Bitcoin’s (CRYPTO:BTC) extreme volatility. Launched in October 2024, BTCI uses synthetic exposure to Bitcoin via the VanEck Bitcoin ETF (CBOE:HODL) and sells layered call options on the CBOE Bitcoin ETF Index to generate substantial premiums.
Bitcoin’s volatility, often exceeding 46% over extended periods, is significantly higher than that of traditional assets like the S&P 500, enabling BTCI to command larger option premiums and deliver outsized distributions. Notably, most of these distributions are classified as return of capital, which can offer tax efficiency by deferring taxes for investors.
Since its inception, BTCI has grown its NAV, making it a rare covered call ETF that delivers high yield without capital erosion. However, this NAV growth is tied to Bitcoin’s bullish run in late 2024 and 2025. With a track record of less than a year, BTCI’s performance in a Bitcoin bear market remains untested. Because BTCI relies on a single, highly volatile asset, it carries significant risk. Sharp declines in Bitcoin’s value could erode NAV and disrupt dividend sustainability, making BTCI a high-reward but high-risk option.
Key Takeaways
While BTCI’s 22% yield is enticing, investors may find greater stability in the NEOS S&P 500 High Income ETF (CBOE:SPYI) and NEOS Nasdaq-100 High Income ETF (NASDAQ:QQQI).
These ETFs offer ultra-high yields of approximately 12% and 14%, respectively, but provide broader diversification by targeting the S&P 500 and Nasdaq-100 indices. This diversification reduces the risk associated with investing in a single asset like Bitcoin.
Both funds have longer track records, demonstrating more predictable NAV behavior through various market conditions, including periods of volatility. Their diversified portfolios help mitigate the impact of sharp declines in any single holding, supporting sustainable dividends over time.
For investors seeking high income with less exposure to the extreme fluctuations of a single asset, SPYI and QQQI offer a compelling balance of yield, stability, and reliability, making them preferable choices for most portfolios.
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