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Finance expert at Bloomberg highlights call writing funds that deliver steady monthly income through different strategies, including quarterly and weekly distributions. Closed-end funds have been found to be effective in providing stable returns, while newer ETFs offer weekly distributions.

Covered call exchange-traded funds (ETFs) have gained popularity among investors seeking steady monthly income. These funds generate income by writing covered call options on stocks they hold, providing a unique strategy that balances income and potential growth. This article explores the different strategies employed by covered call ETFs and highlights the performance of some notable funds.

Covered call options allow investors to generate income by selling options on stocks they own. The strategy involves selling a call option, which gives the buyer the right to purchase the stock at a specified price (strike price) before the option expires. In return, the seller receives a premium. If the stock price rises above the strike price, the seller is obligated to sell the stock at the strike price, limiting potential upside. However, if the stock price remains below the strike price, the seller keeps the premium and can write another option.

ETFs that use covered call strategies can employ various approaches. Some funds, like the Amplify CWP Enhanced Dividend Income ETF (DIVO), hold a portfolio of large, stable U.S. companies and write covered calls on a few of the stocks at a time. DIVO, for instance, has a monthly distribution rate of 4.73% and has returned 14.2% over the past year, outperforming the Dow Jones Industrial Average and the S&P 500 [1].

Other ETFs, such as the Global X Nasdaq-100 Covered Call ETF (QYLD), use a more straightforward approach by writing at-the-money one-month covered call options on the entire Nasdaq-100 Index. QYLD has a distribution rate of 11.60% and has been in operation since December 2013 [1].

More actively managed funds, like the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ), use equity-linked notes to write out-of-the-money call options on the Nasdaq-100 Index. JEPQ has a trailing distribution yield of 10.42% and was launched in May 2022 [1].

The performance of these funds varies. For example, the Invesco QQQ Income Advantage ETF (QQA), which has a more active covered call strategy, has a trailing distribution rate of 9.97% and was established on July 17, 2024 [1].

Closed-end funds have also been effective in providing stable returns. The Eaton Vance Enhanced Equity Income Fund II (EOS) has a long record of strong returns while consistently returning capital to shareholders [1].

While covered call ETFs offer high-income potential, they also come with certain risks and tax implications. Distributed option premium income is fully taxable, unlike qualified dividends on stocks. Additionally, the strategies can limit upside potential if the stock price rises significantly above the strike price.

In conclusion, covered call ETFs provide a unique income-generating strategy for investors. By writing covered call options, these funds generate steady monthly income while providing some downside protection. However, investors should carefully consider the risks and tax implications before investing in these funds.

References:
[1] https://www.morningstar.com/news/marketwatch/2025073023/these-etfs-will-give-you-high-income-but-you-need-to-learn-about-their-strategies-first