In investing, income-focused strategies appeal to those who prefer steady cash flow over high growth. One approach gaining attention is the options-based exchange-traded fund (ETF), which uses options strategies to generate income instead of relying solely on dividends or bond yields. In this article, we examine whether option-based income ETFs fit your investment goals.
Option income ETFs a.k.a options based ETFs operate by systematically deploying options strategies—usually selling calls or puts on underlying assets like individual stocks or broad indexes. Instead of simply holding stocks to capture dividends or capital gains, these ETFs harvest premiums generated by options trading. The income generated from selling these calls is then distributed regularly to shareholders, typically monthly.
This might sound appealing, especially in uncertain or range-bound markets, but the nuances of these strategies run deeper than surface-level appeal.
While the immediate cash flow may be appealing, investors should weigh the trade-offs carefully. Over long market cycles, capped gains can significantly reduce total returns compared to direct asset holding, especially in rising markets.
Also, there’s volatility exposure. Covered call ETFs perform best in flat or moderately rising markets, where they can collect option premiums while sacrificing some upside potential. However, they remain exposed to capital losses if markets decline sharply.
In bear markets, you're exposed to downside similar to owning stocks outright—except that your ability to recover quickly during market rebounds may be constrained due to capped gains.
There’s also the matter of taxes. Income from option premiums is often taxed as short-term capital gains or ordinary income, rather than qualified dividends or long-term capital gains. Depending on how the ETF structures its trades—and your tax jurisdiction—this can significantly affect after-tax returns.
Options income ETFs may look attractive on the surface due to their double-digit yields, but these payouts often come at the expense of long-term capital preservation. Many of these funds rely on selling short-term call options often on volatile stocks — to generate income. However, they don’t always hold the underlying shares, and instead use synthetic or cash-settled derivatives, exposing investors to downside risk without full upside participation.
Any sharp rally in the stock typically means the fund misses out on gains while still being on the hook for option payouts. To sustain their yield, these ETFs frequently sell options close to or even in-the-money, which limits growth. A significant portion of the “yield” is often just return of capital, meaning investors are being paid with their own money. Over time, this model erodes the fund’s net asset value (NAV) — leaving investors with shrinking capital and unreliable performance. For those aiming to build wealth, options income ETFs are often more of a drain than a benefit.
There’s a growing variety of options-based ETFs in the market, each designed with different strategies and risk profiles. Some target broad indexes, while others focus on individual high-volatility stocks. Below is a snapshot of the most popular funds, their strategies, and income potential.
|
ETF Name |
Ticker |
Strategy |
Yield |
|
Global X NASDAQ-100 Covered Call ETF |
Covered Calls on NASDAQ-100 |
11–12% |
|
|
JPMorgan Equity Premium Income ETF |
Equity + Options Overlay |
7–9% |
|
|
Global X S&P 500 Covered Call ETF |
Covered Calls on S&P 500 |
10–11% |
|
|
Global X Russell 2000 Covered Call ETF |
Covered Calls on Russell 2000 |
11–12% |
|
|
Global X Nasdaq 100 Covered Call & Growth ETF |
50% Covered Call on NASDAQ-100 |
5–6% |
|
|
YieldMax TSLA Option Income Strategy ETF |
Single-Stock Covered Call (TSLA) |
30%+ |
|
|
YieldMax NVDY Option Income Strategy ETF |
Single-Stock Covered Call (NVDA) |
30%+ |
|
|
WisdomTree PutWrite Strategy Fund |
Put Writing on S&P 500 |
6–7% |
Assuming a 10-year period, let's compare $1,000,000 invested in QYLD versus QQQ (the underlying ETF), with dividends not reinvested.
|
10 Years |
QYLD |
QQQ |
|
Total Dividends Received |
$1,150,000 |
$194,175 |
|
Ending Capital Value |
$680,000 |
$5,200,000 |
|
Total Value |
$1,830,000 |
$5,394,175 |
This 10-year comparison between QYLD and QQQ highlights the core trade-off between high dividend income and capital appreciation. If you had invested $1 million 10 years ago in QYLD, you would have received a substantial $1.15 million in dividends, providing consistent monthly income—possibly ideal for retirees needing reliable cash flow.
However, that came at a cost: your original capital would have declined to $680,000, reflecting price erosion common with covered call ETFs. Your total value after 10 years would be approximately $1.83 million.
In contrast, QQQ—which tracks the Nasdaq-100 delivered modest dividends of about $194,175 over the decade, but its real strength was in capital growth. Your investment would have grown more than fivefold, reaching $5.2 million in capital value. When dividends are added, your total value climbs to $5.39 million.
Now let's compare YieldMax option-based ETFs with simply holding the underlying stock. Although both may track the same company, their results can vary greatly depending on market conditions.
The following comparisons illustrate how these differences play out in both growth and long-term dividend stocks.
img source: https://totalrealreturns.com/s/NVDA,NVDY
A comparison of $10000 invested in NVDA vs NVDY 2023/05/11 to 2025/06/13.
$10,000 invested in NVDA would have grown to $46,916 (+369.2%)
$10,000 invested in NVDY would have grown to $28,624.40 (+186.2%)
While both delivered impressive returns, the difference reflects how they operate. NVDA captured the full growth of Nvidia's price surge. NVDY, meanwhile, sacrificed upside potential in exchange for high income payouts through call premiums.
This comparison highlights a core truth: when comparing a growth stock to an options-based ETF, you're essentially choosing between large potential capital growth and income generation. Growth stocks offer great upside and compound over time, which makes them ideal for long-term wealth accumulation. In contrast, options-based ETFs deliver high cash flow but limit the ability to benefit from sustained rallies.
img source: https://totalrealreturns.com/s/JPMO,JPM
To further emphasize the structural trade-off, let’s consider a blue-chip, long-term dividend-paying stock: JPMorgan Chase (JPM), compared with its options-based income ETF counterpart (JPMO), over the same period from 2023/05/11 to 2025/06/13.
$10,000 invested in JPM would have grown to $18,040.99 (+80.4%)
$10,000 invested in JPMO would have grown to $11,985.29 (+19.9%)
Here, the gap is even wider in percentage terms. While JPMO provides a more stable stream of income through its equity premium strategy, it also gives up a significant portion of capital appreciation.
Even with its underlying holdings anchored in quality blue-chip names, JPMO's reliance on call-selling strategies mechanically restricts upside, especially during periods of strong stock performance.
Whether you’re considering a high-growth stock or a mature dividend payer, the same trade-off exists: options-based ETFs generally prioritize short-term yield over long-term growth.
YieldMax ETFs use a synthetic covered call strategy to generate income from high-volatility stocks without actually owning them. Instead of purchasing shares of the underlying company (like Tesla or Nvidia), the fund enters into derivative contracts typically total return swaps and cash-settled call options — that replicate the exposure to the stock. It then sells call options on that exposure to collect option premiums. These ETFs often reset their positions daily or weekly, capturing premium income from implied volatility but also exposing the fund to rapid NAV swings depending on the stock’s movement. The entire structure is optimized to extract yield — not to track or grow with the underlying stock. This setup is great for short-term traders chasing income, but it lacks the compounding engine that drives long-term investing success.
While option income ETFs may promise high yields, the reality is that many of them fail to deliver meaningful long-term returns. These strategies often cap upside potential, regularly miss out on major stock rallies, and erode capital over time through return-of-capital distributions. What looks like income on the surface is often just your own money being handed back — with NAV quietly bleeding in the background.
For investors aiming to build wealth or grow their portfolios, these ETFs are rarely the right tool. They may generate attractive monthly payouts, but the cost is steep: missed compounding, limited growth, and long-term underperformance. Most would be better off owning quality stocks or ETFs that participate in market upside rather than relying on structurally flawed income products dressed up as high-yield opportunities.