The Complete Guide to Covered Call ETFs: JEPI, QYLD, and SPYI
Feeling like blue chip dividends aren't enough? Today we're diving deep into covered call ETFs that offer 10%+ yields.
📌 What Are Covered Call ETFs?
Covered call ETFs aren't your typical dividend funds. They combine traditional ETF holdings with an options strategy.
How it works:
- The ETF holds stocks (S&P 500, NASDAQ 100, etc.)
- It sells call options on those holdings
- Collects option premiums as income
- Distributes this income as monthly dividends
Popular covered call ETFs include:
- JEPI (JPMorgan Equity Premium Income)
- JEPQ (JPMorgan Nasdaq Equity Premium Income)
- QYLD (Global X NASDAQ 100 Covered Call)
- QQQI (NEOS NASDAQ-100 High Income)
- SPYI (NEOS S&P 500 High Income)
💰 Yield Comparison
Covered call ETF yields dwarf traditional blue chips:
| ETF | Annual Yield | Characteristics |
|---|---|---|
| SPYI | ~12% | S&P 500 based, stable |
| QQQI | ~14.5% | NASDAQ based, growth |
| QYLD | ~11% | Proven track record |
| BTCI | ~28% | Bitcoin based, high risk |
⚠️ Understanding Dividend Taxes
Before investing in covered call ETFs, you must understand the tax implications.
Qualified Dividends
- Taxed at long-term capital gains rates (15% for most)
- Blue chip stocks and ETFs like SCHD qualify
Ordinary Dividends
- Taxed at your regular income rate
- High earners may pay 30%+ in taxes
- Most covered call ETFs fall into this category
If you're already in the 30% tax bracket, your covered call ETF dividends will also be taxed at 30% or higher. Using tax-advantaged accounts like IRAs or 401(k)s can help avoid this issue.
🔄 Understanding ROC (Return of Capital)
Another key feature of covered call ETFs is ROC (Return of Capital).
What is ROC?
- Not actual dividend income—it's your own money returned
- No immediate taxes (tax-deferred)
- Reduces your cost basis
- Results in higher capital gains tax when you sell
Example: BTCI
- Up to 96% of BTCI's distribution is ROC
- Buy 100 shares at $60 each ($6,000 cost basis)
- Receive $3 per share ROC distribution ($300)
- New cost basis: $5,700 ($57 per share)
- You'll owe capital gains on that $300 when you eventually sell
ROC Pros and Cons:
- ✅ No immediate tax burden
- ✅ More tax-efficient than ordinary dividends short-term
- ⚠️ Higher capital gains taxes down the road
⚡ Avoid YieldMax Funds
You've probably seen ultra-high-yield funds all over YouTube:
| Fund | Yield | Annual NAV Decline |
|---|---|---|
| MSTY | 132% | -31% |
| NVDY | 81% | -35% |
| ULTY | 124% | -49% |
Honestly, isn't a 100%+ yield a red flag?
The fatal flaw:
- NAV (Net Asset Value) erodes rapidly
- ULTY lost half its value in one year
- Dividends don't make up for principal loss
- High expense ratios (1%+)
If you invested $100,000 in ULTY, you'd have $50,000 left after one year. Even with dividends, you might be losing money overall.
🎯 Recommended Covered Call ETFs
Here are carefully selected covered call ETFs:
1. SPYI (Most Stable)
- S&P 500 based
- ~12% yield
- Lower volatility
2. QQQI (Growth + Income)
- NASDAQ 100 based
- ~14.5% yield
- Tech sector exposure
3. BTCI (High Risk, High Reward)
- Bitcoin based
- ~28% yield
- Very high volatility
⚠️ The Limitations of Covered Call ETFs
Let's be honest—covered call ETFs have uncertainties:
- Most are only 3-5 years old
- Haven't been through enough market cycles
- Not proven for 20-40 year long-term investing
Living off dividends requires decades of reliable income, and we simply don't have that much data yet.
✨ Key Takeaways
Covered call ETFs offer significantly higher yields than blue chips, but you must understand the taxes and risks.
- Ordinary dividends are taxed at income rates
- ROC is tax-deferred, not tax-free
- Avoid ultra-high-yield funds like YieldMax
- Stick with proven products like SPYI and QQQI
In the next article, we'll explore how to create a hybrid portfolio that optimally combines blue chips with covered call ETFs.