Why ProShares' Daily Covered Call ETFs Are Outperforming Traditional Strategies in Volatile Markets

In today's volatile markets, investors are increasingly seeking strategies that balance income generation with upside participation. Traditional covered call ETFs have long been a go-to for steady returns, but their monthly expiration cycles often leave investors exposed to missed opportunities during sharp rallies. Enter ProShares' Daily Covered Call ETFs—ISPY, IQQQ, and ITWO—designed to outpace these limitations by leveraging daily option resets. This article explores how these ETFs capture higher income and better upside participation, backed by data and market analysis.

The Flaw in Traditional Covered Call Strategies

Traditional covered call strategies sell call options on a monthly basis, capping upside potential if the underlying asset rises above the strike price. While this approach generates predictable income, it comes at a cost: missed gains during sustained rallies. For example, the Russell 2000 BuyWrite Index, a benchmark for monthly small-cap covered calls, underperformed the Russell 2000 Index by over 30% over a decade (2014–2024). In months when the Russell 2000 surged over 10%, the BuyWrite Index captured just 36% of the upside while still absorbing 85% of the downside during declines. This asymmetry highlights a critical flaw: traditional strategies prioritize income at the expense of equity growth, especially in volatile environments.

How Daily Covered Call ETFs Work

ProShares' ETFs employ daily call options, resetting the strike price and premium every trading day. This dynamic approach addresses two key issues:
1. Faster Theta Decay: Daily options decay in value more quickly, allowing premiums to be collected more frequently.
2. Frequent Resets: By adjusting the strike price daily, these ETFs avoid locking in suboptimal terms during sustained rallies. For instance, if the S&P 500 rises sharply, ISPY's daily reset ensures investors participate in the gains rather than being capped by a month-old strike price.

This mechanism is particularly advantageous in volatile markets, where rapid price swings can outpace monthly strategies' flexibility.

Performance: Income and Upside Capture

The data speaks for itself. Let's break down the results:

Income Generation

• ISPY (S&P 500 High Income ETF): As of late 2024, ISPY offered a trailing 12-month distribution rate of 9.8%, surpassing the 9.2% average of traditional S&P 500-linked covered call ETFs. By May 2025, this rate had risen to 13.82%, while its SEC 30-Day Yield remained at 0.90%.
• IQQQ (Nasdaq-100 High Income ETF): Delivered a 14.31% TTM dividend yield as of 2024, outperforming peers and reflecting the Nasdaq-100's growth-oriented income potential.

Total Returns

• ISPY: From its December 2023 launch to December 2024, ISPY returned 22.5%, outperforming traditional monthly strategies' 16.8% average.
• IQQQ: Achieved a 6.08% YTD return through May 2025, outpacing its underlying index during volatile periods.

Upside Participation

During 2024's post-election rally, ISPY captured more of the S&P 500's gains compared to traditional ETFs. For example, in a month where the S&P 500 rose 8%, ISPY's daily resets allowed it to participate fully, while monthly strategies would have capped gains at their initial strike prices.

ITWO: Tackling Small-Cap Underperformance

The Russell 2000 High Income ETF (ITWO) targets a sector where traditional strategies have historically struggled. Small-cap stocks often outperform in expansionary phases, but monthly covered calls have historically lagged. ITWO's daily approach aims to capture this upside while generating income.

• Case Study: During the 2023 regional banking crisis, ITWO's daily resets allowed it to dynamically adjust to market swings, avoiding the rigid caps that hurt traditional small-cap covered call funds.
• Tax Efficiency: ITWO's use of IRS Section 1256 contracts (60/40 long-term/short-term capital gains split) reduces tax drag compared to traditional ETFs taxed as ordinary income.

Risks and Considerations

While ProShares' ETFs offer compelling advantages, they are not without risks:
1. Volatility Exposure: Daily strategies still mirror their underlying indices' volatility. During declines, ITWO and IQQQ will fall with the Russell 2000 or Nasdaq-100.
2. Limited Track Record: ISPY and IQQQ have only been around since 2023, and ITWO since 2024. Past performance does not guarantee future results.
3. Correlation Risk: ISPY and IQQQ are highly correlated (0.94), limiting diversification benefits when held together.

Investment Advice

For investors seeking equity-like returns with enhanced income, ProShares' ETFs are a compelling choice:
- Income Focus: ISPY and IQQQ offer superior yields to traditional covered call ETFs while maintaining upside participation.
- Sector Play: ITWO is ideal for investors bullish on small-cap recovery, as it avoids the historical underperformance of monthly strategies.
- Portfolio Diversification: Pair daily covered call ETFs with broad-market exposure to balance risk and income needs.

Conclusion

In volatile markets, ProShares' Daily Covered Call ETFs (ISPY, IQQQ, ITWO) demonstrate a structural edge over traditional strategies. By resetting daily, they capture more upside during rallies, generate competitive income, and mitigate the downside drag that plagues monthly approaches. While risks remain, these ETFs are well-positioned to thrive in environments where equity growth and income are both priorities. For investors ready to abandon the income-growth trade-off, ProShares' innovation offers a winning combination.

This analysis underscores the importance of adapting to market dynamics. In an era of heightened volatility, ProShares' ETFs exemplify how innovation in strategy design can deliver superior outcomes for income-seeking investors.