Harvesting Extreme Income From Covered Call Funds

As the fourth quarter gets underway, market sentiment has shifted to decidedly positive outlook for lower interest rates and bond yields. Recent economic data in the form of ADP private payrolls, a weaker labor differential reported by the Conference Board and both the manufacturing and services ISM reports for September 2025 showed signs of economic weakness, with contraction in key areas and stagnation in services.

The benchmark 10-year Treasury tested the 4.0% level twice in September, briefly sold off and is headed lower as of last Friday’s close. A move below 4% will continue to provide further bullish conviction for U.S. financial markets and pave the way for lower mortgage lending rates for businesses and consumers.

While falling rates are bullish for equities and bond prices, income investors will be facing an environment of lower interest income streams in a declining rate market, making it more challenging to keep up with household budgets and inflation.

While falling rates are bullish for equities and bond prices, income investors will be facing an environment of lower interest income streams in a declining rate market, making it more challenging to keep up with household budgets and inflation. There are, however, alternative forms of income outside the bond market that offer some lofty rates of annual distributions that are linked to the major stock market indexes.

The first ETFs selling covered calls on major stock indexes debuted in the mid-2000s, with the earliest being the Invesco S&P 500 BuyWrite ETF (PBP), launched in December 2007. The ETF format made these strategies accessible to retail investors without needing to manage options directly.

These ETFs were designed to replicate the performance of buy-write indexes like the CBOE S&P 500 BuyWrite Index (BXM), which itself was introduced in 2002. Post-dotcom and post-2008 volatility created demand for income-generating strategies that had shown resilience in choppy markets, generating monthly income via option premiums received and providing a measure of downside cushion.

The ETF format made these strategies accessible to retail investors without needing to manage options directly, and their popularity has only grown over the years, both in the number of available ETFs to choose from and assets under management. The five-year annualized return for the CBOE S&P 500 BuyWrite Index (BXM) is approximately 9.52% as of October 1, 2025.

These figures reflect total return, including dividends and option premiums, consistent with the index’s methodology. This compares to the five-year annualized return for the S&P 500 as of August 31, 2025, which is approximately 13%. The CBOE S&P 500 BuyWrite Index (BXM) has historically exhibited about 30% lower volatility than the S&P 500 Index (SPX). This reduction stems from the option premium income, and capped upside inherent in covered call strategies.

So, investing in buy/write strategies doesn’t come without its market equity risks, but the market is entering what is shaping up to be an extended period of declining bond yields that will extend the stock market’s rally, even as the S&P 500 is trading at a historically high P/E ratio based on optimism about future earnings.

Taking a look at the sector, a couple of candidates to consider for superior distribution rates from the NEOS family of ETFs that have grown rapidly include:

NEOS Nasdaq 100 High Income ETF (QQQI): 14.28% Distribution Rate, AUM $5.2 billion.

YTD Performance: 15.30% versus Nasdaq 100 18.10%

NEOS S&P 500 High Income ETF (SPYI): 12.16% Distribution Rate, AUM $5.6 billion.

YTD Performance: 12.77% versus S&P YTD 14.83%

Both of these ETFs are recommended in my Cash Machine high-yield advisory newsletter. To see more information about how to generate a blended double-digit-percentage yield for portfolios, go here and join Cash Machine.

As with any investment noted in this column, investors and/or their advisors should conduct their own due diligence before investing. There are several other buy/write ETFs and closed-end funds pursuing similar strategies, but these two ETFs are paying out some generous monthly distributions coupled with stable to higher share price action.

Both www.etf.com and www.cefconnect.com are great resources for screening for tailored buy/write funds that can enhance overall portfolio yields without sacrificing quality of equity holdings or having to settle for lower-rated bonds to capture higher yields. Everyone needs income and a healthy stock market can deliver it.