The yield of a Covered Call ETF will be influenced by many factors. People who invest in a Covered Call ETF will of course hope that the Covered Call ETF will yield more than a standard Index ETF, but there are never any guarantees that this wish will come true.

Let’s assume that we have two ETFs that hold the exact same portfolio. One is an Index ETF and the other is a Covered Call ETF. Since they hold the same portfolio, they receive the same dividends. But in addition to simply holding on to assets, the Covered Call ETF is issuing call options and selling them. The Covered Call ETF will therefore have additional income in the form of premiums (the price a buyer pays for a call option).

However, there is no way of knowing beforehand if issuing and selling a call option will be profitable or not. If the holder of the call option elects to exercise the option and purchase the underlying for less than the market price on exercise day, the Covered Call ETF will net a loss. This is because the fund must sell the underlying to the options holder for the strike price, and then make a purchase on the open market to balance its portfolio. (Another alternative is to buy back the call option from the option holder to prevent the option from being exercised, but this will of course also be costly for the fund.)

This means that the yield of a Covered Call ETF can vary significantly form the yield of a standard Index ETF, even if they own an identical portfolio of assets.

Fund’s discretion

While we are talking about yields, I wish to point out that most ETFs have a clause in the shareholder contract that gives the fund’s managers the right to create reserves for the fund instead of continuously paying out everything that is possible to pay out to the shareholders.

So, even if an ETF is making 100X USD one month, the managers may elect to only pay out for instance 75X USD of it to the shareholders. The rest is saved in a reserve. This practice is especially common among ETFs where the goal is to pay out a consistent amount on each share every month, rather than let the shareholders experience each swing of the fund.