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Not all covered call ETFs perform equally.
Evaluating performance can be done by comparing stock price returns to index funds.
Covered call ETFs can be a good option for those seeking stock price appreciation and dividend income.

Covered Call ETFs: Income vs. Growth

A Covered Call ETF is an exchange-traded fund that generates income by holding a portfolio of stocks and selling call options on them. This strategy allows the ETF to collect option premiums, offering regular income. While this can lead to higher yields, it also limits upside potential in strongly bullish markets, making these funds more suitable for income-focused investors in flat or mildly bullish environments.

Performance Differences Among Covered Call ETFs

Not all covered call ETFs perform equally. The overall performance, whether you're comparing stock price growth or total return (including dividends), depends largely on the management company and their specific strategy. How can the average investor gauge the performance of these ETFs? A simple method is to compare their historical returns against standard index funds.

Performance Comparison: HTA-Harvest ETF vs. Global X ETFs

I conducted a backtest comparing two popular covered call ETF providers: Harvest ETFs and Global X ETFs, both benchmarked against the NASDAQ 100. The analysis focused on their total returns, which include stock price appreciation and dividend income.

HTA.TO: Harvest Tech Achievers Growth & Income ETF

Harvest Tech Achievers Growth & Income ETF (HTA.TO) aims to closely track the NASDAQ 100 by focusing on 20 large-cap technology companies. The ETF currently offers a dividend yield of approximately 8.5%. While this provides substantial income, the critical question is whether it can also deliver similar capital appreciation as the NASDAQ 100.

As shown in the charts, HTA.TO's total returns, which combine stock price gains and dividends, closely follow the NASDAQ 100, with only slight underperformance due to the capped upside from selling call options. When accounting for dividends, the ETF slightly outperformed the index, and if dividends were reinvested, the outperformance was even more pronounced—up about 10% compared to QQQ over 5 years. This outperformance can be attributed to the high dividend yield, which, when reinvested, compounds returns over time. This suggests that Harvest’s strategy effectively balances income generation with market performance, minimizing the typical performance drag associated with covered calls. Compared to other covered call ETFs, this ability to capture both income and growth makes HTA.TO a competitive option for long-term investors seeking a balance of yield and capital appreciation.

QYLD: Global X Nasdaq 100 Covered Call ETF

Next, let's consider QYLD, the Nasdaq 100 Covered Call ETF from Global X. Offering a dividend yield of 12.1%, it provides even more income than HTA.TO. But how does it fare in terms of capital appreciation compared to the NASDAQ 100?

Despite the high dividend income, QYLD significantly underperforms the NASDAQ 100 in total return. The tech-heavy NASDAQ has experienced rapid growth in recent years, but QYLD's covered call strategy capped the fund's ability to capture those gains, leading to a marked underperformance compared to its benchmark.

Conclusion

The backtested data highlights the importance of understanding the trade-offs with covered call ETFs, especially when comparing different providers. Harvest Tech Achievers ETF (HTA.TO) demonstrates a solid balance between income generation and market performance, making it a strong choice for investors seeking both dividends and capital appreciation. In contrast, Global X's Nasdaq 100 Covered Call ETF (QYLD), while offering a higher dividend yield, may not be suitable for those looking to benefit from the growth potential of high-performing indices like the NASDAQ 100.