The Market May Be Going Nowhere. These Income ETFs Could Benefit.

Stocks are dithering and that may be good news for investors hoping to benefit from an options strategy known as covered calls.

If the shares rise above a specified “strike” price, the fund pays the buyer the difference between the stock price and the strike price. If the stock tumbles or doesn’t rise enough to hit the exercise price, the fund keeps the income. In some instances, funds will use individual stock options, which can be “called away,” meaning that if the share price rises above the strike price, the stock will return to the buyer of the option.

The main drawback is that they are left in the dust during big rallies. “The only time that this strategy really lags behind dramatically is when you have a straight up bull market,” he added. “You participate, but you’re certainly not going to be able to keep up in that environment.” NEOS S&P 500 High Income ETF launched just over a year ago and is up 9.53% this year. The fund’s performance is nearly keeping pace with the broader market: SPDR S&P 500 ETF Trust is up 9.89%.The fund tracks the S&P 500 while also selling call options tied to the index for additional yield. “We’ve captured most of that upside of the S&P 500 while still bringing in real income and paying that out to shareholders,” said Cates.

The fund’s strategy is building a “defensive” portfolio with managers actively picking individual stocks from the S&P 500 and then selling S&P 500 call options.

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