Daily-covered-call ETFs aim to raise income, limit upside loss

Covered-call exchange-traded funds have drawn new inflows as some investors seek higher income amid weaker returns in many bond portfolios. These funds sell call options on their equity holdings and use the option premiums to increase distributions.

Most covered-call ETFs write options that expire monthly. When an underlying security rises above the option’s strike price, the fund’s upside is capped until that option expires, which can cause the fund to miss parts of sustained rallies.

ProShares offers a different structure that uses options that expire each trading day. If a daily option finishes in the money, the fund can sell a new option the next trading day, which can allow the fund to participate in later gains while continuing to collect premiums. ProShares applies this daily-expiry approach to the ProShares S&P 500 High Income ETF (ISPY), the ProShares Nasdaq-100 High Income ETF (IQQQ) and the ProShares Russell 2000 High Income ETF (ITWO).

ProShares data show ISPY posted a 26.86% net asset value return for the 12 months ending April 30 and had a 4.38% 12‑month distribution rate as of May 31. IQQQ returned 37.6% on a NAV basis over the same 12 months and showed a 4.44% 12‑month distribution rate as of May 31. ITWO uses the same daily-covered-call method for small-cap exposure.

Selling options increases income but limits upside on the days the options cover. Daily-expiring options shorten the period of that cap compared with monthly contracts, but they do not eliminate the chance of missed gains when calls are exercised or when prices move rapidly intraday.

Market participants evaluating ISPY, IQQQ or ITWO can compare distribution yields, recent NAV performance and the operational differences between daily and monthly option writing to determine how the funds align with income and growth objectives.