Global X S&P 500 Covered Call ETF

XYLD

Market cap $3.17B

Dividend investing provides a consistent income stream, beneficial for those seeking passive income, while growth stocks may require selling shares to realize gains. Seeking dividend income does not rule out focusing on the growth of the portfolio's nominal value, thanks to many funds that see their NAV grow over time. These securities offer a dual advantage: immediate returns through regular, periodic distributions, and capital appreciation through long-term NAV increase.

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On a recent episode of the Rich Habits Podcast titled “169: Our Favorite Passive Income Strategy (2026),” co-host Austin laid out the covered call ETF pitch that most yield-chasers skip: “Because JEPI uses these ELNs instead of actual listed options, the IRS treats virtually all of the premium income JEPI generates as ordinary income, not capital gains, not return of capital.

XYLD distributes 10% annually through covered calls but sacrifices over 2.5% in annual returns due to strict upside caps on 1-month rolling options. XYLD's theta decay advantage works in flat markets but the S&P 500 historically trends upward with 11% average annual growth making the upside cap costly. In my opinion, the mechanical implementation of XYLD's options strategy doesn't add distinctive value compared to this automatic withdrawals strategy on SPY.

According to the Internal Revenue Service (IRS), passive income generally includes earnings from rental activity or any trade, business, or investment in which the individual does not materially participate.

A covered call ETF holds a basket of dividend-paying stocks while simultaneously selling call options on those same holdings. In return, you get paid a premium. That premium is extra income on top of your regular dividends. Covered call funds work best when stock prices are stable or rising slowly. If the stock price shoots up dramatically, your shares might get called away at the strike price. You miss out on that extra gain. That's the one caveat to covered call ETFs - you cap your upside.

Dividend strategies aim to generate steady streams of passive income over time. At the same time, they should not neglect capital growth, so demonstrating that dividend payouts do not erode their underlying value over the long term. A significant portion of my holdings currently show a positive NAV performance since their launch, which remains for me an equally important goal for the long run.

Covered call ETFs offer attractive monthly yields, often exceeding 10%, appealing to income-focused investors. Most top covered call ETFs are heavily concentrated in large-cap growth, specifically S&P 500 and Nasdaq-100 exposures. This concentration introduces significant risk, as these ETFs exhibit strong performance correlations and similar downside profiles.

Double-digit yields make most serious investors, and they should be wary as there is a history of high-yield funds that are littered with products that paid eye-catching distributions for a few quarters before quietly eroding into irrelevance.

Monthly income above 12% sounds like a promise that usually comes with a catch. These three ETFs actually pay it, though each one earns that yield through a different mechanism, and each carries a different set of trade-offs worth understanding.