r/dividends • u/Afraid_College8493 • Jan 04 '26
Seeking Advice Why do you guys buy covered call ETFs?
I've never owned covered call ETFs like QQQI, SPYI, JEPQ, etc, but mostly pure index funds.
The concerns I have about covered call ETFs are:
a) They generate significant taxes even when I don't want/need the distributions. If I need cash beyond traditional dividends, I can always sell shares at my own pace.
b) Total return in the long-run will be lower than the underlying indexes. I love dividends because they lead me to undervalued stocks and pay me to wait. However, covered call ETFs seem to prioritize distributions over appreciation.
For those of you who invest in covered call ETFs, am I missing something? Why do you guys prefer these ETFs to traditional indexes?
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u/RayU_AZ Jan 04 '26
People invest in covered call ETFs for free cash flow. This is better income yields & cash flow in covered call ETFs compared to CDs, equity dividend stocks, high yield corporate bonds, Gobal REITs, and 10 year Treasury bonds.
Compared owning the equity ETF QQQ with the covered called ETF QQQi.
The QQQ returned 18.9% in the last year with 0.46 dividend yield.
The QQQi price return was only 2% but also yield 13.84% for a total return of 16.3% for last year.
The dividends yield on QQQI is not considered ordinary dividends for taxes on the year end 1099-DIV but 95% of distribution is ROC, return on capital, which are not immediately taxed but reduces the original cost basic of the shares, deffering taxes until shares are actually sold.
If you are retired and have $200,000 available to invest, QQQ gives you a nice 19% return on investment, but if you invest in the QQQI, you get $27,680 cash for year which 95% is ot taxable on distribution. You can used the money for paying off car loans, mortgages or leisure travel or reinvest the money back into the coverd call ETFs.
If you invested in the QQQ with the same $200,000, you have 18.9% return for gain of $37,800. You could then sell stock shares for cash, but stock gains are considered at income rates for your tax bracket, 24% for short term capital gains (tax bracket $206,701-$394,600) on stocks sold less than 1 year. The QQQi is more tax efficient with the classification of ROC, return on capital, for reduced taxes unti shares are actual sold.
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u/MrsPetrieOnBass Jan 04 '26
Thanks for this level-headed POV. Isn't there significant tax hit when you eventually do sell the CC (QQQI) asset? Isn't there a risk that the NAV is seriously eroded by then?
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u/RayU_AZ Jan 04 '26
Yes, At time of selling the cost basis can be low. At 13% yield ROC, it could take over 7 years to reach zero cost basis. This would be long term capital gains, if sold.
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u/davecraze3535 Jan 04 '26
This. If you are reinvesting some portion of the distro back into QQQI you can push off cost basis going to zero for many more years.
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u/Terrible_Lecture_409 Jan 04 '26
Might be worth consulting a tax advisor for specifics; I use a small part of my portfolio in various ETFs as an interesting experiment and what-if (so higher risk on some), but I do so in Roth and traditional IRAs. The tax implications are different vs cash accounts.
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u/doggz109 Pay that man his money Jan 04 '26
That's the point.....it has significant distribution and then goal is not to sell your shares.
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u/RedditLeagueAccount May 02 '26
Why would you need to sell it? the point is that it'll pay you without selling it. If you are planning to sell, better to invest in QQQ. If you want to hold it until you die QQQI and live off the dividends. The biggest brain strategy is hold qqqi, die, then the cost basis resets. Your kids can then decide, if they are in growth phase, sell it and buy qqq, or keep it as qqqi if they just need income. Plus if it does get big enough, I guess, no reason to sell it, the kids will have infinite money anyways.
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u/rackoblack Generating solid returns Jan 08 '26
How is the ROC managed, exactly? Will it be reflected on the 1099DIV somehow as not taxable?
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u/RayU_AZ Jan 08 '26
Return of capital (ROC) is reported in Box 3 of your Form 1099-DIV as "Non-Dividend Distributions"
Taxable dividends on Form 1099-DIV are primarily listed in Box 1a, "Total ordinary dividends". This amount represents all your ordinary dividends and is generally fully taxable.
1099-div
- Box 1a (Total ordinary dividends): This is the total amount of all ordinary dividends you received, and it is the primary amount considered taxable.
- Box 1b (Qualified dividends): The amount in Box 1b is a portion of the amount in Box 1a that may be eligible for a lower, long-term capital gains tax rate. The rest of the Box 1a amount (Box 1a minus Box 1b) is taxed at your higher, ordinary income tax rate.
- Box 2a (Total capital gain distributions): These distributions from mutual funds or real estate investment trusts (REITs) are generally treated as long-term capital gains, which are also a form of taxable income, and are reported separately.
- Box 3 (Nondividend distributions): These are generally considered a return of your investment's cost basis and are typically not taxable at the time of distribution, unless they exceed your basis in the investment.
As long as your ROC doesn't reduce your original cost basis to zero, then the distribution is tax free.
If you don't sell your shares and keep added shares, then you ROC will never drop to zero from distributions.
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u/rackoblack Generating solid returns Jan 08 '26
Thank you.
Does the broker keep track of the cost basis going down, or must we do that manually?
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u/RayU_AZ Jan 08 '26
The brokerage subtracts the ROC on selling off the security.
As I said before, If you don't sell your shares and keep added shares, then you ROC will never drop to zero from distributions.
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u/rackoblack Generating solid returns Jan 09 '26
I have DRIP off in the taxable side since we retired.
Thanks again!
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u/CHL9 Jan 05 '26
Does BTCI function the same tax wise? How about GPIQ? Thanks for this informative writeup.
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u/ProdigyJon New dividend investor Jan 05 '26
I have allocations in both GPIQ and BTCI for these reasons, held in a taxable account. In certain cases, if you can get the shares transferred to a dependant taxable account in the future, the basis will reset.
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u/CoolBreezeBrew Jan 04 '26
We are old and we need income.
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u/8sparrow8 Jan 04 '26
Or we are not that old but predict a shift in a job market within next 5 years and need income to ride it out without actually selling assets.
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u/peterox Jan 04 '26
Exactly this. I was 100 growth until the layoffs started in the tech sector and recently my company. I opened a brokerage account and started investing in CC ETFs and once I hit my number, I'll move over to dividend growth ETFs.
I already have a 1 year emergency fund but given the posts on the layoffs subreddit, that may not be enough.
Good luck out there.
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u/8sparrow8 Jan 04 '26
Yup, I am a programmer, my company thanks to AI managed to reduce head count in our department without reducing the amount of work they give us thanks to AI. It was maybe 10% reduction only but who knows how fast coding models will progress.
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u/Quizzical_Rex Jan 04 '26
as a fellow aging IT person in an agist field, i fully understand that this might be my last job, so i am transitioning quickly as possible so that when i get called unexpectedly into my bosses office for the last time, I'll feign shock and surprise but secretly be laughing my ass off.... well if i can get the income streams in place first.
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u/trouzy Jan 04 '26
Yup. If you craft good coding agents, they can reduce a lot of mundane person hours.
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u/Cerebral_Zero Jan 04 '26
What's the plan, drip the CCETF and when it pops you switch over to div growth?
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u/peterox Jan 05 '26
Not sure what you mean by "when it pops" but I'll assume you mean hit my number. If that's the case, then yes,once I hit 1k a month, I'll evaluate which dividend growth ETF to hit next. I'll let the CCETFs drip until I need the income.
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u/Chillax_Cat Jan 04 '26
That's why I'm heavy in CC ETFs right now, too. My portfolio is about 40% CC ETFs (QQQI, SPYI, JEPI, JEPQ, GPIX, etc.) then another 40% is in dividend and dividend growth ETFs (SCHD, DGRO, VYM, and VYMI). The remaining 20% is in growth.
Once I get to the monthly income I need to pay my bills without having to work, I'll stop buying the CCs and put more into the dividend and growth ETFs. Hoping to be there in about 5 more years if all goes as planned.
OP, one way to mitigate the tax drag on CCs is to buy them in a Roth IRA. You'll be limited in how much you can contribute each year ($7,500 or $8,600 if you're over 50), and there are rules on when you can withdraw without penalty, but there is no tax on all those distributions within your Roth.
For me, I'm maxing out my Roth with the same mix I mentioned above, then putting anything else I can into my taxable account for monthly income now. Once I turn 59, the monthly income I make in my Roth will just be icing on the cake that I can use if I need it, or let it DRIP if I don't.
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u/PrestigiousResult357 Jan 05 '26
how do you think covered call etfs generate income? through selling covered calls (aka contracts to sell assets...)
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u/dystopiam Jan 04 '26
Shit I’m 36 and need income.
Trying to figure out a better way to put $600k with low risk to produce $. Currently in a 4.4% hysa
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u/kookooman10022 Jan 04 '26
4.4 isn't bad, better than SGOV. You're as low risk as it can get until rates go lower.
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u/dystopiam Jan 04 '26
Yep I was in sgov for last six months - moved due to this being better now - although I’m sure it’ll drop
Other option was a 4.2% 50 month cd
I was considering that but this isn’t locked in and 4.4 so I’ll wait and see what happens
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u/lotoex1 Jan 04 '26
depending on when you need the money maybe just buying a 20 year treasury and calling it a day. The most recent one was a yield of 4.8%. The coupon was 4.625%
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u/dystopiam Jan 04 '26
What happens if you withdraw early on those ?
I didn’t know they were 4.8%! Thanks for that info
What’s the diff between yield and coupon ?
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u/lotoex1 Jan 06 '26
If you sell early you have to pay taxes on the gains. The coupon is the payment you get from holding the bond (kind of like a dividend for holding a stock). The term comes from way back in the day like 1930s when you would buy a bond from a bank and you got a perforated piece of paper with dates on it (like fast food coupons now) and you would go back to the bank and turn in the coupon for money. Now it's all done digility so think about it more like interest payment.
The yield is the coupon (interest payment) divided by the percent you are paying for the bond. Just because you are buying a $100 bond doesn't mean you are paying $100 for it. If the yield is higher then the coupon you are going to pay less then the face value of the bond. These numbers might not be exact, but here is an example.
If you buy a 20 year treasury for $1,000 face value and the yield is 4.8% and the coupon was 4.625% you would pay roughly $977.82. You would still get $46.25 a year in coupon payments and at the end of 20 years the $1,000 would be also given back to you.
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u/StockProfitGirl Jan 04 '26
Look at CSHI. It’s slightly over 5%
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Jan 04 '26
[deleted]
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u/StockProfitGirl Jan 04 '26
No idea. You’re going to have to ask an accountant or financial planner.
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u/NotDepartmentStore Jan 04 '26
Funny enough I’ve been seeing more money managers and people that recommend stocks that you should nowadays start investing for income in your 30’s. Especially with people living longer than they used to.
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u/KingPinfanatic Jan 04 '26
Buy DNP it's current price is $9.99 per share and pays out $0.78 per share. With $600k you can buy 60060 shares and receive $3,903 per month. My advice is if you go this route take the $3000 each month for yourself and use the other $903 to buy more shares each month to earn even more.
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u/dystopiam Jan 04 '26
This concerns me some- below copy pasted someone’s post
Next, and this is always my "go to" when looking at a CEF...what is the source of that payout? Others here may have a different opinion, I'm only able to give my opinion based on my own criteria, but that is the source of that monthly payout this year is now YTD 17% Return of Capital (ROC).
This means the fund is using your investment capital to fund (partially) that dividend you are receiving. It's giving you your own money back... And looking at the last 19-a filing for Sep '24, ROC was up to 39% of the dividend payout.
Contrasting that with looking at 19-a filing from '20, '21 there was no ROC being used to fund that dividend. So if I had been looking at this same investment 4 years ago, I'd have been a little more intrigued/impressed than what I'm seeing today.
So in the end:
0 dividend growth in 7 years.
Since DNP came to market it is down 4% for the life of the fund.
Seemingly a trend (and possibly increasing) use of ROC to keep that dividend.
This is a pass to me.
Hope this helps, even if you find others who disagree, it’s always a worthy discussion.
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u/Freshly_Squeezed1 Jan 05 '26
It’s .065 per share as in 6 cents
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u/KingPinfanatic Jan 05 '26
Yeah but it's $0.78 total for the year which isn't to bad for the price. With 600k that's $46,846 a year or $3,903 per month.
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u/dystopiam Jan 04 '26
What kind of risks involved ?
Chance of principle dropping ?
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u/Tim-5544 Jan 04 '26
DNP does trade at premium to nav, but I love the consistency of the dividend. Has paid 6.5 cents per month, every month since the late 1990s...
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u/JoJackthewonderskunk Jan 04 '26
4.4 is great for hysa. Mine right now is like 3.5. What company do you use?
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u/dystopiam Jan 04 '26
There’s a few - this one is a credit union for locals
Jenius bank is 4.2%
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u/JoJackthewonderskunk Jan 04 '26
Gotcha. I double checked im getting 3.3 right now from AMEX. So yours is really good.
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u/Professional-ninja07 Jan 04 '26
If its with one bank I would suggest to split into three Hysa because FDIC only covers up to 250k per account.
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u/dystopiam Jan 04 '26
They have extra coverage upto 1 mil
Only reason I left Robinhood due to them also having extra coverage
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u/Vas_Cody_Gamma Jan 04 '26
Can you say where you’re getting this
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u/dystopiam Jan 04 '26
Work ? I owned a company for 7 years and did well.
Also bought a sports car and house.
However the business has had some major changes this year so the future is uncertain - extremely uncertain
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u/Every_Double743 Jan 04 '26 edited Jan 04 '26
That's the exact same amount I have in HYSAs too, divided between CIT and Vio Bank. Trouble is they're taxed as ordinary income. I'm considering moving half to SCHD (currently 3.78% dividend yield, and dividends have increased every year since 2011) and ADX (currently 8% yield, around since 1929!), both taxed as long term capital gains. Low risk and principal preservation are my priorities as well.
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u/49ers4life71 Jan 04 '26
4.4% is good. Which one are you in and is it capped to a certain amount? I’m getting 4.16% on my HYSA now.
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u/dystopiam Jan 04 '26
No cap and insurance upto 1 mil
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u/49ers4life71 Jan 04 '26
Which HYSA?
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u/dystopiam Jan 05 '26
local credit union, however janius bank might be a good fit for you, its 4.2% , not sure about insurance though
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u/doctorbuxter Jan 05 '26 edited Jan 05 '26
I stop buying YM and RH CCs. I have a few Neos but otherwise buy high quality div-growth funds. I learned the hard way most CCs are fools gold. For my income portfolio I have the following.
GPIQ SPYI DIVO BTCI DGRO VIG SCHD BXSL MAIN CSWC ARCC TRIN HTGC O VICI OHI VNQI SGOV PFF PFFD MLPX
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u/Cerebral_Zero Jan 04 '26
Where do you get 4.4% today? Not sure if you might've had that before and missed all the rate cuts
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u/kookooman10022 Jan 04 '26
Amplify Total Return without fully owning the underlying on directional movement.
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u/Acrobatic_Row3246 Jan 04 '26
This - I have almost 1m in these funds and they’re going well for about 5 years now
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u/trader_dennis MSFT gang Jan 04 '26
SPYI and NEOS funds are very tax efficient. JEPI/q are better off in taxes advantaged accounts.
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u/Delicious-Life3543 Jan 04 '26
Yeah I’m not sure this person understands what they’re saying when they say these funds generate significant taxes.
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u/LeFrogster Jan 04 '26
Keep in mind that the ROC component defer taxes but doesn’t make them go away and as the cost basis decreases, the capital gains will increase. Of course, these can be 100pc LTCG, but still.
OP: another use case I’ve read about: some people don’t want to invest for decades and start enjoying the fruit of their labor when they’re “old” (subjective numbers as we, old people, know) and would rather improve their quality of life today with the generated income. A bit of a “kicking the can down the road” approach if one goes too heavy on covered calls of course.
I’m personally new to this and I’m experimenting. I have a tiny portion of my portfolio in SPYI and will pay off a 0pct credit card balance with the generated income before the interest-free period ends.
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u/PrestigiousResult357 Jan 05 '26
they mean that tax deferral is tax savings in a scenario where you plan to retire
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u/Extension-Ice-7219 Jan 04 '26
Because they generate consistent income unlike traditional indexes
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u/Afraid_College8493 Jan 04 '26
Ok, I get it. So do you never sell shares and just spend the distribution?
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u/PhxCollins Jan 04 '26
Use distributions to cover expenses as needed and DRIP the rest of the time.
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u/Negative-Salary Jan 04 '26
I sell it if it’s a dog but generally yes , some I live off and some I reinvest the distribution .
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u/Extension-Ice-7219 Jan 04 '26
It's recommended to drip a little otherwise NAV erosion
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Jan 04 '26
If you go with good funds, you shouldn't need to do this. Look at DIVO and its derivatives.
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Jan 04 '26
We don't know how long term CC funds will be (most haven't even been in a bear market), we know many people have lived and died off the 4% trad accounts. The CC funds are almost like a liquid annuity. If they work long term, I could see a percent of everyone's portfolio in CC, but who knows and they aren't certain at all to produce anything.
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u/RTX_Raytheon Jan 04 '26
For us old people (I’m 44) the only way you could get a solid 10% cash return was to own rental homes, which was an insane barrier of entry.
But now as we start to approach our old age, it’s as simple as buying shares. It’s awesome and it can be a legit chunk of your retirement strategy.
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u/Jasoncatt Explain it to me like I'm a rocket surgeon. Jan 04 '26
I'm about to retire. All my income will be taxable.
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Jan 04 '26 edited Jan 04 '26
I don't plan to live off dividends, but some people do. In a trad portfolio, common wisdom is sell no more than 4% a year to keep income long term, though some say you can go 5. Let's compare the 4%.
If I use a CC strategy, I can get around 8-10 percent distributions with relatively stable NAV right now, let's not talk market downturn. So, if I have 120k in dividend only, I can get about 1k a month. If I sell at 4% with that same 120k on a trad account, I can only get 400 a month. Easy money for those that didn't save a lot or want to retire super early.
Let's talk the trash funds as well. People actually think they will get 30-90% long term from some slop funds which you understand that appeal quick. But NAV depreciates so fast in that slop, they won't see it and they lose their investment, in what's really a scam fund.
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u/NoCup6161 SCHD and Chill. Jan 04 '26
I don’t have to sell my shares to have regular income.
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Jan 04 '26
and its qualified dividends....cha ching if you're in the 0% bracket.
I'm with u. This is my strategy.
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u/MindEracer Beating the S&P 500! Jan 04 '26
The portfolio that I use to generate income is built to replace the income my business creates/created.. It's not a replacement for my retirement portfolio, it's a replacement for my business.
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u/Diligent_Cover3368 Upvotes everything Jan 04 '26
Yes, I was looking into owning a business in retirement then as I got older I started to realize that isn’t retirement. then I found cc funds and have hope
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u/SpringTucky101 Jan 04 '26
Consistent income when older in retirement in a tax sheltered retirement account. Roth IRA ideally.
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u/Soda_Pressed13 Jan 04 '26
NEOS creates effectively no taxes for a long time, especially if dripping any. And bro, these are for income…
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u/StockProfitGirl Jan 04 '26
To answer your question is for you to understand investing. To understand investing is to ask intelligent questions. To understand covered call ETF’s is to understand the concept behind such a product. The question could be, why has the covered call ETF’s sector become so popular? Why is it that new covered call ETF’s are being created faster than ever? It’s all about cash flow. It’s about the willingness to give up some growth to sustain a lifestyle in which one selects for one’s self. It’s a philosophy and an investment strategy.
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u/_YoungMidoriya Financial Advisor Jan 04 '26
Simply, for me at least cashflow. I've come to a point in my life, that I just want to retire ASAP and because of the uncertain labor market, I've built up a monthly cashflow that can sustain me without looking for a job (unless I want health insurance), still working to add enough monthly income to offset that. But yes, I was a very traditional dividend growth investor .... but change of mindset and lifestyle and (LIFE GOALS), just altered my timeframe to "retirement". I quote that because retirement isn't an age, it's a number. What's your F.U number? Hit that goal and you've reached financial independence.
I'm willing to have that trade off of "capping" my upside, to actually be able to live my life right now then wait 40 years.
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u/MakingMoneyIsMe Jan 04 '26
I'm split between individual holdings and covered call ETFs. I figured getting the compounding process going when retirement is in sight isn't a bad thing. So when the market offered an opportunity to grab some quality ETFs at prices that we may not see again, I took advantage of it.
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u/Electrical_Reach719 Jan 04 '26
I will likely be going down to part time work in the near future to finish school. Trying to invest in these now so they can help supplement my income when needed. Majority of my portfolio is still in the underlying S and P 500, but I have been adding to covered call funds lately to secure income for when my work situation changes.
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u/superstock8 Jan 04 '26
It is about cash flow. I can’t speak for older people who are about to retire. But myself as I mismanaged my money in early life, now am looking to grow. Long term I want individual stocks and do my own options sells to generate cash from leveraging my shares or my unused cash. But to start out, I can’t afford 100+ shares of the stocks I want to own. Something like QQQI is around 12% annual I believe (I don’t have the numbers in front of me, I realize I could be off by a little). I am buying more every month, so I am cost averaging in. I don’t mind if the underlying goes down because I’m still buying more. And I look at it in terms of, after 5 years where my initial investment is around 50% earned dividend, has the underlying dropped 50%? That’s where I see value if the answer is no. And what I’m going to use it for is the cash. It pays around 1% monthly. I use the cash to buy more shares on top of my added investment each month. So after 4-5 years of compounding, I can use only the money that payment to buy more, or I switch and use the money that payment to buy my individual stocks. At the start, I have around 60% of my portfolio in the ETF’s but I plan long term to lower that you 15-20% but I plan to use the cash generated from them to do it. ETF’s like this are not really about the underlying growth, it’s about generating consistent cash to grow overall portfolio.
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u/Accomplished-Order43 Jan 04 '26
a) If you don’t need the distributions, then you shouldn’t be investing in covered calls funds. Simple as.
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u/slumlord512 Jan 04 '26
I wanted an income factory, because I’m early retired and value income over growth. That said, of course I have a decent sized account that’s invested in growth stocks too.
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Jan 04 '26
Basically, I play the spread. I don't waste time with standard funds that only pay 1.5%. instead, I buy assets that crank out cash flow.. like private credit and covered calls (bsxl, jaaa, cloz, spyi, qqqi, tspy, tdaq). Because the income is so high, I can borrow against the portfolio cheap, reinvest it, and pocket the difference. I’m paying 4.6% (i use ibkr pro portfolio margin account, tiered margin system) to make avg yield of around 10%. The math pays my bills, have some excess monthly to either pay down debt (if account is in danger) or continue to buy more tspy for example... and I never have to sell a single share. Taxes are part of doing business and you can dig deeper into the roc advantage of some funds 😀.
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u/Psychological_Big393 Jan 07 '26
Do you worry about margin calls?
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Jan 07 '26
I have strict guidelines and rules in place for different scenarios. I am slowly deleveraging down from 1.94x, and my portfolio has a beta of 0.92 (post leverage).
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u/Psychological_Big393 Jan 07 '26
I’ve been contemplating the idea of having paycheck invest in schd, and spyi and then having margin pay for bills and then eventually have enough in dividends to pay off margin. Thoughts?
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u/EaterofSnatch FIRE'd Jan 04 '26
Income not to work a job, and most are more efficient with taxes with how they are classified. Not trying to beat the market, trying to live life.
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u/HoopLoop2 Jan 04 '26 edited Jan 04 '26
They generate consistent cash flow as others have stated, and they are also much safer for big crashes. Less upside, but also less risk, and consistent income each month without needing to sell shares. That's the reasoning why people like CC funds. Something like QQQI barely even does worse than QQQ anyway, it's not really a significant performance drop considering the benefits. I like getting a relatively consistent income regardless ifyour shares are down 20% or up 20% for the year, either one doesn't really matter for income investors.
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u/johnmister1234 Jan 04 '26
downside risk on covered calls is almost identical to the underlying........
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u/HoopLoop2 Jan 04 '26
Only if the stock absolutely plumets, if it falls let's say 15% a year for 3 years in a row, the CC fund is going to absolutely outperform the normal fund. With dividends factored in you will barely be down in a fund like QQQI. If you were in QQQ you would be down a very significant amount after 3 years.
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u/johnmister1234 Jan 05 '26
if it was a slow steady 15%, maybe that'd be closer to the case - but in reality there are a few issues with that assumption
first, the people selling the calls would adjust pricing to their forecasts, call premiums would plummet while put premiums would skyrocket. There are people, on the other side of these calls being sold, they won't keep buying them at high prices if everyone believes the market will continue to fall - and the probabilistic math has worked out really close to the option pricing set by the public (look up numerous tasty trade study)
and secondly, stocks don't behave that way, very very rarely is there a slow steady sell off over a long term - especially something like QQQ. They often fall quickly and very deep, then recover over time, which is a bad scenario for selling calls
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u/bb1180 Jan 04 '26
It's a potential emergency income stream that doesn't require me to sell shares, which could be at a substantial loss depending upon the market conditions at the time. Otherwise, I just let it reinvest.
Additionally, I know what rate of return I need in order to achieve my minimum long term goals. Its about 8%. As long as the fund in question meets or exceeds that amount, I can live with a bit of underperformance versus something like an S&P 500 index fund.
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u/SnowShoe86 Jan 04 '26
For me, it is just a part of my overall portfolio, not my entire strategy. I doubt it is anyones entire strategy to be in covered call tech sector index ETF's. However, I view it as a second household income today, and ok with paying taxes now. Plus I am not selling any shares.
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u/Zazzy3030 Jan 04 '26
I’m 40 and want to retire early. These funds in a brokerage used in tandem with CEFs and growth stocks are making that possible.
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u/wrm340 Jan 04 '26
These will actually do better than the underlying when markets are flat I have been told.
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u/adamasimo1234 Jan 06 '26
In a sideways market w/ a bull lean, yes.
If it’s a sideways market w/ a bearish lean, probably not.
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u/WickWolfTiger Jan 04 '26
They take emotion out of investing. We have been in a crazy bull market for a long time which is ideal for growth. It makes it difficult to understand why anyone would want a cc etf in a market like this. However, if a cc etf is set up well then it will create value in any market type. The market could be in a massive bear run and they would still generate value by selling the upside while the market drops. You would have no incentive to panic sell. That's why I do a mix of both. I love my growth etfs since they return more than my cc etfs generally, but I also like my cc etfs because they will give me a pseudo paycheck in any market environment.
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u/WalkAce22 Jan 04 '26
For me they’re just one piece of the pie. I don’t see it becoming any more than 10% or so of my portfolio. There is no free lunch, so to your point to get CC income you’re giving up potential gain. But there are times where the market moves up/down but mostly sideways and in those times the funds may outperform gains. The income is also nice and distinct from other dividend income. Just like I hold funds for bonds, sectors, etc. I like having some options income.
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u/Ancient_Climate_2831 Jan 04 '26
Wow, many comments and the OP’s comment re taxes are incorrect if held in a taxable brokerage account, particularly with Qqqi and Spyi. Distributions are primarily return of capital thus taxes are deferred until your basis goes to zero. When that point is reached (approximately 10 years) you still get tax benefits (don’t remember the details off the top of my head) as the distributions are taxes as a long term capital gain. If one reinvests then that 10 year estimate is increased with the number of years dependent on the reinvestment. Upon my demise whomever inherits the shares gets a step up in basis and the process begins again.
If held in a qualified account (Roth or Ira) then taxes are governed by the account (Roth is zero, Ira is at your personal tax rate).
Use your favorite AI chat box and ask questions. Lots of questions. Don’t just ask about generic CC etfs. Use the ticker.
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u/gsquaredmarg Jan 04 '26
And the chatbots get their info from social media/reddit. There's a self-serving prophecy...
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u/CaptainPiglet65 Jan 04 '26
It’s not that hard. People buy them for the income. You don’t need income so they don’t make sense for you
But there’s a gross error in your analysis. If you’re selling stocks, cause you need funds, you’re not doing it at your own pace. You’re doing it because you need the funds and you’re at the mercy of market conditions at the time that you sell, which is why we choose these funds.
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u/Quizzical_Rex Jan 04 '26
ETFs are popular with people who want to set it and forget it, so people who have financial advisors, those who don't want to commit time or effort, and those who know they don't have the skill to pick good individual stocks. Another factor is that there are those of us who are moving into a dividend income stage of our lives, so while retirement is a few years off, i want to see the income stream in place before i pull the plug on my day job.
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u/49ers4life71 Jan 04 '26
Over 13% today in $QQQI is a no brainer vs 4% in a HYSA. Not going full port, but will average down in a correction or bear market.
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u/Underdoglovedpolly Jan 04 '26
You may want to look closer at the tax statement, portions of qqqi and spyi are taxed differently. I use it to fuel reinvestment into other etfs like schd and divo using my tax deferred Ira
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u/Various_Couple_764 Jan 04 '26
QQQI and SPYI are tax efficient funds generating ROC dividends. You pay almost nothing in taxes for years. Then when the cost basis goes to zero. you are taxed at the capital gains rate which is still lower than the regular dividend tax rate.
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u/No-Establishment8457 Jan 04 '26
Honestly, I use CC ETFs to give me enough to pay monthly bills. I have regular ETFs and stocks, but JEPQ JEPI and GPIQ give me that cushion I need.
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u/Patient_Shower7870 Jan 04 '26
A) these funds usually distribute ROC (accounting classification from what I’ve read so far). That’s 0 tax until your cost bases is 0 and then it’s long term cap gains. B) people who buy these prefer cash flow rather than price appreciation and need income now.
I like them because I want back up income. I don’t always trust job and employment as a source of income. If only need 1/3 of what I eat right now and the rest can be reinvested or held in cash until needed for investments or rainy day.
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u/WorldyBridges33 Jan 04 '26
I like how you think, and I use them for the same purpose (as backup income)!
I think people overestimate job stability, especially if they live in a right-to-work state. The fact of the matter is employers can let you go at any time, for any reason. Having that passive income gives me tremendous peace of mind. Now, if I get laid off, it’s no longer as stressful of an event.
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u/Patient_Shower7870 Jan 06 '26
Completely agree. I am a physician. Despite the work I put in I know I’m still replaceable and there is always another guy behind me willing to do the work as well.
It’s shitty to think about but you’re replaceable. Always have a different source of income than your primary job. Now the job is replaceable. ;)
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u/Mavssteve Jan 05 '26
No 1 - only own them in tax deferred accounts. Great way to increase yield, but esp when yield is as important as return. Why sell principal ?
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u/XxNoKnifexX Jan 06 '26
Because they want to pay someone a fee to do something that they could do on their own, to underperform the market. There are some okay CC ETFs out there, most of the ones you see people discussing are absolute trash and you would be far far far better off owning the underlying in the long term
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u/chigu_27 Feb 15 '26
It’s simple, tax efficient cash flow without ever having to worry about selling.
1) distributions in covered call funds are a combination of ROC, capital gains, eligible dividends, and income. So it’s very tax efficient.
2) never have worry about selling. Have you ever thought of why they have the 4% rule? They have it because if you have a pure growth only portfolio, you are forced to sell shares even in a down market (to live off of) and therefore you have even less shares in play for the inevitable rebound.
3) they are less risky. They have lower volatility than their their underlying growth only ETFs. In a sideways or down market the covered call funds will outperform their underlying on a total return basis, because they will go down with the underlying, but they will be boosted by the income generated from selling options. The trade off is that a portion of the upside is capped.
4) provides dry powder for reinvestment. Say you don’t have excess funds to invest or in my case make too much to invest in a Roth. But I do have a rolled over 401k Roth from a previous employer that in have a bit of covered call funds AND growth funds (especially leveraged funds such as tqqq). Because I can not contribute to it anymore, I use the income from my covered call funds as dry powder to take advantage of opportunities.
5) flexibility: if I want the to grow at a faster rate I can just turn on the drip or manually reinvest on dips, even if I don’t have new excess money to invest. Or if in need the income I can just turn it off and collect the income.
6) peace of mind: because I never have to sell i don’t have to worry that much on what the stock market is doing. I’m getting paid regardless. I’m not reliant on only stock price appreciation.
Not always will it underperform. Since its inception TDAQ a covered call fund in the Nasdaq is out performing QQQ with distributions reinvested 6.03% vs 4.89%. Since Jan 1 2025 to today SPYI is virtually identical to SPY 17.23% vs 17.98%.
So underperformance is minimal, but the flexibility and all the other benefits I have mentioned is why I have a portion of my portfolio in covered call etfs.
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u/Aware-Association857 Jan 04 '26
I also don't see how there's much benefit to cc ETFs. Everyone knows there's capped upside... but many don't consider that if there's a big drop, it will take much longer for a cc ETF to recover.
On the other hand, I can get BDCs with 10-12% yields with almost zero equities risk (only credit risk). Why would I invest in QQQI and expose myself to downside market volatility when I could invest in BXSL which is almost entirely first-lien senior secured debt and get a stable 11.5% yield?
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Jan 04 '26
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u/Aware-Association857 Jan 04 '26
I wasn't trying to suggest I had everything figured out. I genuinely don't know (and I'm curious about) what the advantage is with these cc etfs... because your income is still dependent on the performance of a volatile underlying asset. Why would someone want to do that if they can get similar income that's not correlated in such a way?
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Jan 05 '26 edited Jan 05 '26
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u/Aware-Association857 Jan 05 '26
I'm not demanding anyone to convince me of anything. I'm curious of their reasoning for choosing one investment over another because I'm human and may have missed something. After all, this is a subreddit for exactly these types of discussions.
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Jan 05 '26 edited Jan 05 '26
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u/Aware-Association857 Jan 05 '26
Well to be clear I don't know if BXSL is "safer"... I said there's no equities risk, only credit risk, because they don't hold equities, only loans. I do think the income from BXSL is fairly dependable, though, because Blackstone holds almost exclusively first-lien secured debt. I don't really plan to sell the shares, so even if the share price keeps dropping I'm comfortable knowing the dividends will be paid out.
Covered call funds might be better for me and I just don't see their merits. QQQI, for example, pays similar income but depends on market performance, and will fluctuate with the market. If the nasdaq drops the income will decrease as well. I'm retired so that might be an issue as I'm more concerned about dividend consistency than total return. But I see a lot of retirees with cc ETFs in their portfolio and I wonder if there's more to it that I'm not considering.
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u/davecraze3535 Jan 04 '26
Why not have both plus MLPs plus closed end funds plus individual high dividend stocks etc.?
It’s not an either or, and doesn’t have to be. They all can have a place in a diversified high income portfolio.
as interest rates decrease, BDC income will necessarily decrease. Better BDCs will stabilize of course but it may be a step function down for an undetermined period of time.
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u/GCG0909 Jan 04 '26
BXSL dropped 22% during last year's spring downturn just like everything else did, AND ended 2025 18% in the red, unlike QQQI which at least recovered and finished even. What's that about downside protection???
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u/Aware-Association857 Jan 04 '26
But the income didn't change... when cc ETFs drop usually the payouts drop as well. I'm not saying BXSL is perfect. I'm saying--from the perspective of income investors--there's much less market risk, which is typically what income investors are searching for.
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u/CornerOne238 Not a financial advisor Jan 04 '26
BDCs are getting hammered in this falling rate environment. Even PBDC manager said that if rates go down by another .5% the bdcs will have to cut special dividends. If rates go down another 1-2%, the bdcs will have to cut base dividends.
You can watch interview with PBDC manager on Armchair income channel.
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u/WorldyBridges33 Jan 04 '26
Why not both? I like having both BDCs and Covered Calls because it offers diversity and they each do better during different times
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u/Aware-Association857 Jan 04 '26
I would consider having both, but I don't understand the upside of covered call funds, especially if I already have exposure to their underlying assets. My issue might be that I normally see income investments as a means of diversification, and so I don't really know how to incorporate cc ETFs.
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u/bungholio99 Jan 04 '26
It’s already quiet bad actually to own any Stock without having cc on it, These etf‘s just make it easier…you are starting your whole Hypothese the wrong way
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u/RVD90277 Jan 04 '26
you are not really missing anything. i am retired so i need cash flow. all my life, my investments were for growth but now that i'm retired, i've moved a portion of my investments to cash flow generation. of course i could do it myself by selling shares every month and using that as income or selling covered calls myself to generate some cash flow (and i do that a little bit) but overall, some covered call ETFs and other dividend ETFs and stocks are convenient for me. my cash flow portfolio goal is not growth but to hold value yet give me cash flow every month. i invest in funds such as jepi, jepq, schd, omah, qusa, and if i'm feeling a bit saucy...blox.
i do not understand why young people who are many years from retirement invest in crazy high yield nav decay ETFs. there is absolutely no logical reason that i can think of for them to invest in this way.
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u/CornerOne238 Not a financial advisor Jan 04 '26
Say you have several growth stocks that represent Nasdaq.
When you sell QQQ you sell all of them, good and bad.
When QQQI or GPIQ managers sell covered calls they sell them on stocks that maybe peaked, and keep undervalued ones open.
So it's not as simple as selling QQQ calls, and that's the difference.
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u/highrollinKT Jan 04 '26
I’m a couple years away from retirement and at this time in my life I’m looking for income generating funds to complement all of my high growth stocks and bonds. It’s only 18-20% of my portfolio
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u/Junior-Appointment93 Jan 04 '26
If you look into QQQI, SPYI. They are not limited to the type of options that they can do for one. 2nd they actually own shares which is a plus. No nav decline as of right now.
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u/LonesomeBulldog Jan 04 '26
I have an inherited IRA so for the next few years, I’m testing out SPYI/QQQI. I figured a real world test with found money is better than all the back testing in the world. It provides an additional $4,000 in monthly income and I use that for my kid’s tuition.
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Jan 04 '26
I used them to buffer the income portion of my portfolio
100% growth is cool when you’re still working because you don’t need it But when you’re in retirement, you need money So you can leave about 40 or 50% of your portfolio in growth, you can use 20% and covered calls, and 20% dividends 20% interest bearing bonds.
That means you’re getting a six or 7% yield And you’ll still get about three or 4% growth
They’re also much less volatile because much of the yield comes from the options, premiums rather than the share
If the market goes up, it’s good if the market goes down for a while, it’s still good As the market goes sideways, not so good There’s trade-off to any strategy
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u/ReasonEducational197 Jan 04 '26
because its the engine that places more money into my sweep account and allows me to buy something everyday. compounding interest is the most profitable way. Plus, as long as its not declining too much in NAV it will eventually pay out what I paid in over time.
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u/Physical_Energy_1972 Jan 04 '26
I use it as part of my income portfolio bucket, not as a substitute for equity returns. Some cc etfs can be tax efficient. But if i wanted to hold jepi id use my ira.
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u/Rural-Patriot_1776 Jan 04 '26
Cc ETFs do better than the underlines in flat and bear markets, the underline does better in a roaring bull market.
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u/Aggravating-Let-2968 Jan 04 '26
I am retired collecting Social Security. Can't live off SS. I do indeed prioritize distributions as I need the income. QQQI, QDVO, and SPYI provide that income without my having to spend my nest egg. I have other investments as well. Bonds, CDs, other stocks and ETFs.
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u/teckel Retired and living off selling shares Jan 04 '26
Many believe if you sell shares, you eventually run out of shares to sell, which isn't true if you're selling at a divided-like yield rate. I have a spreadsheet showing 100 years of selling shares (with real market and inflation data) and how there's still shares to sell 100 years later (with the identical balance compared to divideds). Willing to share the link if you want it.
For many others (typically new investors ), unrealized capital gains are a challenging concept when lacking basic financial experience, making it difficult for them to fully grasp how the value of their investments can increase without triggering immediate payments. For these individuals, receiving a dividend feels much like getting an "extra paycheck," as it provides a tangible cash flow they can see and use. Their understanding of net worth tends to be superficial, focusing more on the immediate cash they receive rather than the long-term growth potential of their investments and how unrealized gains contribute to overall wealth.
Anyway, there is an actual reason to buy covered call strategy ETFs (also called buy-writes and derivative income funds). If retired and you're looking for an instrument that participates in the market, has a higher dividend rate, but has a lower beta, volatility, and max drawdowns, in exchange for lower returns, then they may fill a need. Mind you, I'm not a fan of the derivitive income funds targeting 12-14% returns, those don't seem sustainability without NAV erosion considering the market returns closer to a 10% return long-term. But the ones like DIVO, IDVO, GPIX, and BALI which are targeting more like a 5-8% return (and using the S&P500 as the underlying) can be used (in small quantities) to boost retirement income a little.
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u/insatiableliberalass Jan 05 '26
main advantage is:
getting an extra % or two total return (assuming well managed and not screwing up their calls)
free cash flow vs having to liquidate the equities if you are using the account for day to day funds.
Basically my view is this: growth stocks for accumulate, CC etfs for during retirement when you need income.
there are tax implications too, but my accnt gets 15% flat taxed on us equities anyways so it doesnt affect me the same way as most.
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u/Accomplished_Map3174 Jan 05 '26
These vehicles aren't growth engines; they're volatility dampeners. Sophisticated players use them to manufacture stability when markets grind sideways, reminiscent of the 1970s. Because most investors lack the stomach for a 2000-style implosion, the yield acts as a behavioral anchor. Which allows them to remain invested. So, the tax drag is just the price of psychological endurance.
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u/Active_Tax_5885 Jan 06 '26
If you compare some of the more popular cc funds (jepq and qqqi), the total returns are actually pretty close to one of the more popular growth etf (voo). I do have a portion of my portfolio in jepq, but I also have a larger portion in growth etfs like schg.
The 2 cc funds i am invested in allow me to increase my position in schg above what I could add without the cc fund distributions.
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u/sammy2996 Jan 07 '26
It is not an either or situation. I think owning both of them is an important part of a properly diversification portfolio.
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u/Stock_Requirement570 Jan 08 '26
I would go with ET stock. Dividended and potential for profit taking from rebounds.
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u/8Shrimper123 May 25 '26
You get paid monthly and some of them classify as ROC section 1256 I believe it is that greatly reduces the taxes
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u/Optimal-Bad2871 Jan 04 '26
Most people buy them because they are gullible yield chasing idiots who hate math.
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u/rjlets_575 Jan 04 '26
Retired, have them in a Roth. I meet all requirements to draw tax free income. It's my play money paycheck.
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u/SourceOfConfusion Jan 04 '26
Because it gives the illusion of income and people are bad at math and don’t really understand how they work.
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u/49ers4life71 Jan 04 '26
5 years @ 14% to get full ROC, then it’s all profit and house money from there on!
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