The Hidden Risk in Covered Call ETFs No One Talks About

Ajouté : 2026-05-11

[00:00:00]If you ever looked at a covered call ETF and you see the yield is paying anywhere between a 10, 12, or even 15% in income, and the first thought of your mind is, is this too good to be true? Well, that is a great question to be asking because not all covered call ETFs are created equal. Some have been paying you income month after month, but in the process, it is eroding the value of this assets.

[00:00:27]Now, that's NAV erosion. That is the silent killer of your ETF portfolio happening right in front of your eyes.

[00:00:33]But, here's what's interesting. Not every covered call ETF does this, and so today we're going to be talking about a few covered call ETFs that have held up their NAV. We're going to be talking about what NAV erosion is. We're going to be talking a little bit about how covered call ETFs work, looking at some return of capital, and some things to look out for to see if covered call ETFs are eroding their NAV. And so, I want to just take a little preface around this that not all covered call ETFs are perfect, but some are much better than others. And on my channel, I like to talk about the ones that continue to hold their NAV throughout the down and good times. And so, those are the ones that I like. But, we're also going to be talking about some covered call ETFs that may not be so good. So, let's get to it and let's get started. This video is purely educational content. It should not be considered personal finance advice. I'm not a licensed financial advisor, and I don't know your financial situation, risk tolerance, or even investment goals. Past performance doesn't guarantee future results, and always do your own research and consider consulting with a qualified financial professional before making any investment. All right, let's get on to the video. Hey guys, my name is Steve, and I run the Frugal Expat website, where we try to help you all save more and invest better. And today we're talking about the truth behind NAV erosion, and which ETFs do hold their value. And today we're going to be talking about this and diving in straight into it. Now, let's start off with the beginning. A covered call ETF is an ETF that holds different stocks.

[00:02:06]Maybe they will trade, and they'll they'll sell covered calls on them.

[00:02:10]Maybe they'll do some spreads. Maybe they may sell some puts on them. There's just all sorts of different option overlays they could be doing within these ETFs. Now, not all of them are perfect. Some will offer more conservative yields of anywhere between that 5 to maybe 15% range. Some may have yields of anywhere between 20 to 40, and some may even say they have yields of 60 to 100%. Now, I want to caution you guys because some of the really high-yield ones probably aren't good, and probably you should stay away from. Now, the ones I really like are between that 8 to 15% range, and that's because those are a little bit more conservative, and they tend to hold their NAV over time. We'll be looking at how these things hold up. So, when we're looking at a covered call ETF, it's going to pay the yield based upon distributions. So, what it's doing it's selling those options, and also maybe even buying some options. And so, they're collecting premium or even creating income based upon that, and they're distributing that to their shareholders. Now, a lot of them are going to be using return of capital, so you invest maybe $10,000, and it's going to be returning some of the capital back to you as a return of capital. This is like a tax deferral upon based upon, so then you don't have to get taxed on some of the income coming in. Now, when the market does go up, um a lot of these ETFs will go up in price as long as they're not selling the entire portfolio. And that's why when I talk about risk that some of these will have some capped upside, and so won't be able to capture now like like a stock like Amazon uh has recently gone up. And so, if you had a bunch of covered calls on it, that could cap your upside on those stocks and ETFs. So, the NAV is the net asset value. And so, a $10,000 investment into a covered call ETF, you hope that it goes up in value on price alone and not just the total return.

[00:04:11]Total return is going to be those dividends reinvested for the long term.

[00:04:16]And so, a lot of people will look at total return with like a good growth ETF, but that's a lot of price return as well. And so, when we're looking at these covered call ETFs, we also have to look at the price return of these ETFs.

[00:04:31]Now, if we take a look at SPY or QQQI, let's look at like a SPY. And you look at SPY, the price return over the max is around that 4 to 5%. And QQQI, we take a look at that one, we can see that the price return is trending upwards. It is not trending downwards. Now, if we look at an ETF like QYLD, QYLD has been around since like 2013, and we can see that the price return of it is down about a little bit over 29%, 29.66%.

[00:05:06]Now, that is not very good because your NAV is actually losing value over time.

[00:05:12]So, if you're getting paid every single month and you have a 12% yield on a $10,000 investment, so you're getting paid about $1,200 per year, and you're hoping that $10,000 investment will continue to go up in price. But at the end of the year, if it's sitting at $8,500, you have lost $1,500 in the process while getting me only $1,200 in income. And so, that means your investment has actually lost money instead of gaining money. That's what we're trying to avoid. That is NAV erosion. Now, with a good bit of ETFs like QYLD has lost about 30% over its lifetime. So, that means you're actually losing money in that process instead of gaining money. So, we're going to be looking at just five particular ETFs that continue to grow. And these ETFs are some of the big names out there, and so that's why we're taking a look at them. Now, not all covered call ETFs are built the same. There are two fundamentally different types of ETFs with the covered call strategy. First of all, you have those that are selling 100% of their portfolio. That means what they're doing is selling their 100% of their portfolio. They're selling options on that, and they're hoping to gain as much yield as possible. Now, the bad part about that is with a bull market run, they're going to cap that upside.

[00:06:28]And so, as the assets continue to grow and continue to grow and snowball, well, your ETF actually goes down in price appreciation because it's capped its upside. Now, you have the other kind of the line where you have a partially overwrite kind of strategy where basically the fund is only doing a portion of their entire portfolio, allowing part of it to continue to grow in the upside. Now, we see this with a lot of the Neo's funds. They're doing about 60 to 90% of portfolio. The Goldman Sachs, the GPIX, GPIQ are doing anywhere between the 25 to 75%. So, it's a little bit more, allowing a little bit more upside. A lot of the Amplify funds do the same thing. And the Amplify funds kind of mix with some blue chip dividend companies and some growth companies. And so, you're getting a little bit difference. And so, with this, you're going to see a much larger total return.

[00:07:20]You're going to see a big price appreciation, and you're going to see that the NAV does not erode over time.

[00:07:26]If you like this video, and you really want to continue to learn more about how to create a good strategy and good portfolio for you, I am doing a lot of one-on-one coachings, and I want to be able to do some one-on-one coaching for for guys. And so, I'll go to leave a link in my description and my pinned comments, and you guys can click and sign up, and we can arrange a time where we can go over your strategy, your investment portfolio, and work on making it even better. All right, let's get back to our video. Now, we take a look at five different ETFs, we can see how they have done in the the past with their NAV and the price return. Now, if we take a look at this SPYI chart, we can see that it's come up about 5% for the price return of the asset. Now, you can see as it goes up and down, that's because of some up and down in market volatility that's going on. And so, we look at SPYI as kind of a gold standard.

[00:08:21]It's from Neos. Like I said, Neos does anywhere between the 60 to 90% selling of their portfolio. They sell covered calls on the SPX, which is the S&P 500 index, and that qualifies for 1256 contracts, giving people about a 60/40, so 60% long-term capital gains, 40% short-term capital gains. They're going to do return of capital around like that 90 to almost 100%. And so, you going to get return of capital for that, which lowers the cost basis, but still it continues to grow for the price appreciation. Another great Neos product would be QQQY, which tracks the Nasdaq 100. Now, this came out in January 2024, so it doesn't have the longest range, but as you can see it by the chart, it's up for the price appreciation. And you saw have some market volatility with the tariffs in April 2025, and also with Nasdaq going down in February and March of 2026. And so, as it's going back up, you can see that the price return continues to grow, and this is also a good positive turn when you see the NAV kind of continuing to go up. Now, one of my favorite examples of seeing good price appreciation is GPIQ. So, GPIQ is from Goldman Sachs, and while this may not have the yield of QQQY, it does track the Nasdaq-100 just like QQQY.

[00:09:42]Both of them are really good ETFs. QQQY does about 14% yield. GPIQ does about 10% yield. But as you can look at the chart, GPIQ has it like a 32% price appreciation over a pretty good period of time. And so you're going to have a little bit more price appreciation, but a little bit less yield. Both of them have positive NAV returns and so they're both very good to hold in your portfolio. But as you can see that with this, you're still getting some good price appreciation. That's because GPIQ sells anywhere between the 25 to 75% of their portfolio any given time. So sometimes they'll sell 25%, sometimes they'll sell much higher. And so when they're selling these, they're not capping their upside on the entire portfolio. And so that's good news to you. Now if we take a look at some other ETFs, sometimes we see large yields from ETFs like from some YieldMax ETFs. Some YieldMax ETFs may not be the best because what they do is they'll sell a huge portion of their portfolio on some of these assets and they'll do maybe one individual stock and they do like synthetics and they'll promise huge high yields, but also they have bad NAV erosions. Like you can take a look at TSLY from YieldMax. This tracks Tesla and it's a synthetic option laid ETF or fund. And so this one is down, the NAV is down about 86%. Does that mean it's good? No, you've lost 86% of its money.

[00:11:18]And so that's not very good and you can see the down trending of the price appreciation and that's just not good to watch. Now they have other ones just like that, but they also have some good ones like SOXXY and CHIPPY that track semiconductors. They have a huge portfolio of semiconductors, and those, those two, have some positive um NAV, and that's because they're not synthetic, they're not promising massive yields as well, and they also have some pretty good price appreciation with the assets under management. And so, those are some good ones from YieldMax, but you also have a lot of bad ones. I'm going to go over four ways where you can check the NAV on each individual fund.

[00:11:57]Now, first way is you can check Seeking Alpha. Uh all of these charts that I showed you are from Seeking Alpha, and I use Seeking Alpha to do research on many ETFs, and you can see that with the price appreciation and the total return, and you notice that the total return continues to go up, but the price appreciation continues to go down. And this is with some individual ETFs and stocks. And so, you got to make sure to check out that and to see if one of the other is going on and seeing if this could be a good one for you. Step two is you can check out the the price of the asset from a year ago compared to today, because a year ago, if it was higher and today is much lower, then this may not be good. And a classic example could be QYLD. It started off around $30, now it's around 17. Now, at that point, $30 down to 17, you've lost money. And so, that's NAV erosion, that's the basic individual way. Now, of course, market volatility does happen, and so, if you were to look at maybe things that went on from January 2025 to January 2026, things may look different. And vice versa, you may look at May of 2025 versus May of 2026, and things could be much up. And so, you just got to take a look at those as well. Step three is you got to take a look at if the income you're getting exceeds the NAV erosion going on. Like my classic example, the $10,000 invested, if you were getting $1,200 a year, but your investment dropped to 8,500, you're having NAV erosion. Now, if you were you invested $10,000 and you got $1,200, but the NAV has dropped down to 9,000, well, you're still net positive. And so, you got to look at those things as well. In step four, also look at the fund in different markets um conditions. Like, if we take a look at the fund during maybe the tariffs of 2025, you may think that the NAV eroded. Well, not really cuz the entire market went down. So, you got to also look at different functions with and conditions within the market just to see if the NAV is eroding because of different things that are going on, or is it eroding because it's a it's not really a very good fund. So, the bottom line is, first of all, NAV erosion is real. A lot of ETFs do have NAV erosion.

[00:14:05]There is 800-plus different options strategy ETFs on the market, and not everyone is good. The way I look at it is I try to stay a little bit conservative. I look at the yield. Now, if the yield is anywhere between like a 10 to 15, maybe 17%, and it's not uh skyrocketing really crazily, then I also start to take a look at the underlying assets. Is it synthetic? Do they own their own stocks? And is it with a good company that has a good reputation? Now, the way I also look at it is the price appreciation really happening, or are we getting just a whole bunch of our return of capital and nothing is really moving?

[00:14:41]Those are some things that I like to try to look at. Now, some good funds and good fund companies I like are I like the Neos funds. Neos funds have done pretty good over the long term, and they continue to very good. They're very conservative on their yields, and so, I like that. I like the Goldman Sachs ones because they don't sell so much of their portfolio, and they have that 25 to 75%, and you see that with some good price appreciation. I have also seen that with the JP Morgan ones. May not be tax efficient, but they have some very good conservative yields. They don't have much NAV erosion, and so, those are like some good ones that you could put in your portfolio. Tap Alpha's doing pretty good. Now, the the price has drifted up and down. Well, it has had some market conditions, so we'll see what happens in the future. But, they have a pretty good yield. They have some pretty good assets, and you just got to take a look at what's going on with the NAV. Now, I do caution people on some of the YieldMax ones because some of the YieldMax ones have skyrocketed high yields, but they're not making it up with the uh price appreciation. Now, I do have to say that JEPI, CHPY, is a pretty good semiconductor ETF. Now, it's got us some pretty high yields, but also the price appreciation has really kept up with that. So, there are some goods and bads. You just have to do your research on some of these. And some of these just aren't good, like QYLD. No offense to those that may hold QYLD. The fact is, they have gone down about 29% in their entire lifetime of the ETF. And so, as I look at it, I really don't want to own something that continues to drift downwards. And so, that's got to be something you have to look at. It also sells 100% of its portfolio, and so it's very much capping its upside. Now, let me know in the comments, are there any ETFs that you've may have been burned on? Are there ETFs that you think are really good? I mean, there's the plusses and minuses, but we can always learn from each other. And what is a lesson you have learned while investing in some of these income ETFs? All right, and if you like this video, make sure to check out a video up here of are covered call ETFs worth it? And I'll see you guys in our next video.

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