ETFdb Logo
  • ETF Database
  • Channels
    • Themes
      • Active ETF
      • Alternatives Channel
      • Artificial Intelligence
      • China Insights
      • Climate Insights
      • Core Strategies
      • Crypto
      • Disruptive Technology
      • Energy Infrastructure
      • ETF Building Blocks
      • ETF Education
      • ETF Investing
      • ETF Strategist
      • Faith-Based Investing
      • Financial Literacy
      • Fixed Income
      • Free Cash Flow
      • Innovative ETFs
      • Invest Beyond Cash
      • Leveraged & Inverse
      • Modern Alpha
      • Portfolio Strategies
      • Tax Efficient Income
    • Asset Class
      • Equity
        • U.S. Equity
        • Int'l Developed
        • Emerging Market Equities
      • Alternatives
        • Gold/Silver/Critical Materials
        • Crypytocurrency
        • Currency
        • Volatility
      • Fixed Income
        • Investment Grade Corporates
        • US Treasuries & TIPS
        • High Yield Corporates
        • Int'l Fixed Income
    • ETF Ecosystem
    • ETFs in Canada
    • Market Outlook
    • Crypto ETF Hub
  • Tools
    • ETF Screener
    • ETF Country Exposure Tool
    • ETF Database Categories
    • Indexes
    • Scenario Analysis
    • Watchlists
    • Head-To-Head ETF Comparison Tool
    • Mutual Fund To ETF Converter
    • ETF Stock Exposure Tool
    • ETF Issuer Fund Flows
  • Research
    • ETF Education
    • Equity Investing
    • Dividend ETFs
    • Leveraged ETFs
    • Inverse ETFs
    • Index Education
    • Index Insights
    • Top ETF Sectors
    • Top ETF Issuers
    • Top ETF Industries
  • Webcasts
  • Themes
    • AI ETFs
    • Blockchain ETFs
    • See all Thematic Investing ETF themes
    • ESG Investing
    • Marijuana ETFs
  • Multimedia
    • ETF 360 Video Series
    • ETF of the Week Podcast
    • Gaining Perspective Podcast
    • ETF Prime Podcast
    • Video
  • Company
    • About VettaFi
    • Get VettaFi’ed
  • PRO
    • Pro Content
    • Pro Tools
    • Advanced
    • FAQ
    • Pricing
    • Free Sign Up
    • Login
  1. How Covered Call ETFs Can Help for Your Portfolio
News
Share

How Covered Call ETFs Can Help for Your Portfolio

Special to VettaFiNov 01, 2021
2021-11-01

By Derek Horstmeyer, Reina Tran, and Tao Wei

Often investors look at covered call strategies and wonder, is this the alpha generating strategy that I need to add to my portfolio? Now, investors don’t even have to construct covered call strategies all on their own – multiple ETFs have popped up in the last decade that create and roll over the strategy for an investor using call options on the S&P 500, NASDAQ 100, and Russell 2000.

With this in mind, we decided to look at how these covered call ETFs have performed over the past eight years (since the inception of the first covered call ETF available to the US public).  We examined the full set of such ETFs available and then examined the median returns, volatility, Sharpe ratios and correlation with other assets.  At a basic level the results are clear – covered call ETFs fail on a risk adjusted basis to beat large cap equity strategies and offer little in diversification benefits.

First, it is worth detailing what exactly is going on behind the scenes with respect to these covered call ETFs.  A covered call strategy is constructed by holding a long position in a stock and then selling call options on that same asset, representing the same size as the underlying long position.  This will limit the upside payout but also expose the investor to the downside should the stock fall in price.

Turning to the results, covered call ETFs underperformed across the board.  Covered call ETFs averaged a return of 8.68% per annum, while the S&P 500 average a 14.81% return over the same time period.  Covered calls had a volatility of 11.26%, while the S&P 500 just had a slightly higher volatility of 13.61%.  Putting these two figures together, we see that the Sharpe ratio of the covered call ETFs averaged 0.73, while the S&P 500 averaged 1.05.  Even when we compare the average covered call ETF to our bond index fund it underperforms on a risk adjusted basis (bond index fund had a Sharpe ratio of 0.88).


Content continues below advertisement

Covered Call Chart 1

While they underperform on a risk adjusted basis, perhaps they help in terms of diversification.  Examining the correlation coefficient between the averaged covered call ETF and the S&P 500, we get 0.94.  This highlights that adding a covered call ETF to your all equity portfolio really doesn’t do much in terms of adding diversification.

Covered Call Chart 2

Next, we decided to look at how covered call ETFs did over different interest rate environments.  Perhaps covered call ETFs do better over decreasing interest rate environments as compared to rising interest rate environments.  To test this idea, we separated our returns into three categories: increasing interest rate periods, stable interest rate periods, and decreasing interesting rate periods (using the Fed funds rate to define periods).  Unfortunately, covered call ETFs did not have any meaningful better returns in any of these periods as compared to the S&P 500.

Median Returns (Monthly)Rising Interest RateNeutral Interest RateFalling Interest Rate
Covered Call ETFs1.331.751.20
S&P1.751.911.65
Bond Fund0.420.140.27

Finally, we examined the crash risk of the average covered call ETF.  To do this we used the DUVOLT measure which is the Log of standard deviation of monthly returns for up weeks divided by the standard deviation of monthly returns for down weeks.  An up (down) month is defined as a month when the asset-specific month return is above (below) the annual mean.  Using this measure we got a poor result of -0.21 which nearly matches the S&P 500 crash risk over the same period.

All in all, the results are clear.  Covered call ETFs underperform the S&P 500 and bond indexes on a risk adjusted basis, offer little in diversification benefits and have comparable crash risk as compared to the S&P 500.  In sum, it may be something you want to give close scrutiny before deciding to invest.

For more news, information, and strategy, visit ETF Trends.

» Popular Pages

  • Tickers
  • Articles

Jun 18

WGMI a Second Quarter Top Performer

Jun 18

T. Rowe ETFs: Active Benefits at Competitive Prices

Jun 18

As Active Bond ETF Demand Picks Up, Here Are 2 Options

Jun 18

ETF of the Week: Invesco S&P 500 Momentum ETF (SPMO)

Jun 18

Industrial Demand Creating Momentum for Silver

Jun 18

The Case for Going Global Now

Jun 18

The Robot Will See You Now & AI Will Read Your Results

Jun 18

AI Growth Could Energize This Leveraged ETF

Jun 18

Rainwater Equity Makes ETF Foray With New Active Fund

Jun 18

Cryptocurrencies: Bitcoin Remains Above $100K for 6th Straight Week

VOO

Vanguard S&P 500 ETF

QQQ

Invesco QQQ Trust Series I

IBIT

iShares Bitcoin Trust ETF

GLD

SPDR Gold Shares

IVV

iShares Core S&P 500 ETF

SPY

SPDR S&P 500 ETF Trust

SHLD

Global X Defense Tech ETF

SCHD

Schwab US Dividend Equity ETF...

ITA

iShares U.S. Aerospace &...

SMH

VanEck Semiconductor ETF


Content continues below advertisement

Loading Articles...
Our Sites
  • VettaFi
  • Advisor Perspectives
  • ETF Trends
Tools
  • ETF Screener
  • Mutual Fund to ETF Converter
  • Head-To-Head ETF Comparison
  • ETF Country Exposure Tool
  • ETF Stock Exposure Tool
  • ETF Database Pro
More Tools
  • Financial Advisor & RIA Center
Explore ETFs
  • ETF News
  • ETF Category Reports
  • Premium Articles
  • Alphabetical Listing of ETFs
  • Browse ETFs by ETF Database Category
  • Browse ETFs by Index
  • Browse ETFs by Issuer
  • Compare ETFs
Information
  • Contact Us
  • Terms of Use and Privacy Policy
  • © 2025 VettaFi LLC. All rights reserved.

Advertisement

Is Your Portfolio Positioned With Enough Global Exposure?

ETF Education Channel

How to Allocate Commodities in Portfolios

Tom LydonApr 26, 2022
2022-04-26

A long-running debate in asset allocation circles is how much of a portfolio an investor should...

Core Strategies Channel

Why ETFs Experience Limit Up/Down Protections

Karrie GordonMay 13, 2022
2022-05-13

In a digital age where information moves in milliseconds and millions of participants can transact...

}
X