A covered call ETF swaps some of your future growth for income today. Over the three years to 30 September 2026, every covered call ETF we track returned less than the plain index fund it is built on: UMAX made +45.8% against +69.5% for IVV, and YMAX made +23.2% against +39.9% for ILC. They suit investors who value steady, high cash payments over growth, and who understand what they give up.
How a covered call ETF works
The fund buys a basket of shares, such as the top 20 Australian companies or the S&P 500. It then sells call options over those shares. A call option gives someone else the right to buy the shares from the fund at a set price. The buyer pays the fund an upfront fee, called a premium, for that right.
That premium is the extra income. Added to the normal dividends, it lets these funds pay distributions well above a plain share fund.
The catch is what happens when markets rise strongly. If the shares go above the agreed price, the fund has effectively sold that upside to the option buyer. You keep the premium, but you miss much of the rally.
- Markets flat or drifting: the fund keeps its premiums and usually does better than the plain index.
- Markets rising strongly: the gains are capped, so the fund lags, often by a lot.
- Markets falling: the premium softens the fall a little, but you still take most of the loss.
Every covered call ETF vs its plain index
The fairest test is to compare each fund with a plain ETF holding the same kind of shares.
| Covered call ETF | Fee | 3 years | Plain index ETF | 3 years | Gap |
|---|---|---|---|---|---|
| YMAX (ASX top 20) | 0.76% | +23.2% | ILC | +39.9% | −16.7 pts |
| AYLD (ASX 200) | 0.60% | +31.0% | A200 | +36.8% | −5.8 pts |
| UMAX (S&P 500) | 0.79% | +45.8% | IVV | +69.5% | −23.7 pts |
| UYLD (S&P 500) | 0.60% | +27.3% | IVV | +69.5% | −42.2 pts |
| QMAX (Nasdaq 100) | 0.68% | +57.8% | NDQ | +89.5% | −31.7 pts |
| QYLD (Nasdaq 100) | 0.60% | +34.8% | NDQ | +89.5% | −54.7 pts |
| JEPI (US, active) | 0.40% | +18.0% | IVV | +69.5% | −51.5 pts |
| JPEQ (Nasdaq, active) | 0.40% | +51.2% | NDQ | +89.5% | −38.3 pts |
Cumulative total returns including distributions to 30 September 2026. JEPI and JPEQ are actively managed premium income funds that use options differently, so the comparison is a guide only. Source: TMX Australia monthly funds report.
Covered call minus plain index
The pattern is clear. The stronger the market, the bigger the gap. The Nasdaq 100 had a huge three years, and the covered call versions captured at best about two thirds of it.
The one time it worked: a flat market
There is a fair exception. Over the past year Australian shares went almost nowhere: A200 returned just +2.9%. In that sideways market, AYLD returned +7.9%, five points ahead, because it kept collecting option premiums without having to hand over much upside.
This is exactly how the strategy is meant to work. Covered calls do best in flat, choppy markets and worst in strong rallies. The trouble is that nobody can reliably tell in advance which kind of market is coming, and over long periods share markets have tended to rise more often than not.
What $10,000 grew to
Covered call vs plain index over 5 years
Over five years, $10,000 in UMAX grew to $15,680. The same money in IVV grew to $18,779, about $3,100 more. In YMAX it grew to $13,110 against $14,622 in ILC. Those gaps include all the distributions the covered call funds paid out.
The yield trap
The big distributions are what draws people in. But a distribution is not free money: it comes out of the fund's value. If the income paid is higher than what the fund earns in total, the unit price tends to drift down over time, and so does your future income.
That is why we always look at total return, which counts both the income and the change in price. A fund paying a large distribution and returning 5% in total has done worse for you than one paying a small distribution and returning 10%. With the second, you could sell a few units to create your own income and still be ahead.
The fee and tax drag
Covered call fees vs plain index fees
- Fees. Covered call funds charge 0.60 to 0.79% a year, many times the 0.04% of IVV or A200. On $100,000 that is $600 to $790 a year against $40.
- Tax. Option premium is generally paid out as income each year, rather than left to grow as an unrealised gain. For investors on higher tax rates, more taxable income every year can mean a bigger tax bill. The Australian funds still pass on franking credits from the shares they hold, but they pay out a larger share of non-dividend income. Your tax adviser can tell you how that applies to you.
- Pension phase is different. In an SMSF or super account in retirement phase, investment earnings are generally tax free, so the tax drag matters less. The growth drag does not go away.
When a covered call ETF can make sense
- Retirees who want high, regular cash and would otherwise sell shares at bad times. Some investors value that discipline enough to accept lower growth.
- A small part of an income portfolio, alongside plain share funds, rather than the whole thing.
- Investors who expect a flat market, accepting they could be wrong.
For many income investors, a broad dividend fund or a plain index fund plus a cash buffer has done the job with lower fees. See our income ETF guide and Australia's dividend ETFs compared, or compare directly: IVV vs UMAX, ILC vs YMAX and VHY vs YMAX.
Compare covered call and plain index ETFs →
Common questions
Are covered call ETFs a good investment?
They do what they say: pay higher income. But over the three years to 30 September 2026, every one we track returned less in total than the plain index it is based on. They suit investors who put income ahead of growth.
Is YMAX better than VHY for income?
Over five years VHY returned +62.4% in total and YMAX +31.1%, and VHY charges 0.25% a year against YMAX's 0.76%. YMAX has paid a higher distribution, but much of that was growth given up.
Do covered call ETFs protect you in a crash?
Only slightly. The option premium cushions a fall a little, but the fund still owns the shares and takes most of the loss.
When do covered call ETFs do best?
In flat or gently falling markets. Over the past year, when Australian shares barely moved, AYLD beat A200 by five percentage points.
Joshua Stega is a financial adviser with 20 years' experience and the founder of ETF Adviser. He built ReviewETF to make every Australian ETF easy to find and compare.
General information only. It does not take into account your objectives, financial situation or needs. Consider the PDS and TMD before investing. Past performance is not a reliable indicator of future performance. Data as at 30 September 2026.