Why it's time for Australian investors and advisers to wake up to covered call ETFs

Several months ago, my ex-partner called me asking for help.

Her mother's health had deteriorated and she'd recently moved into residential aged care. To help fund the ongoing costs, the family had sold her home, leaving around $300,000 to invest.

The maths was simple, but the investment challenge wasn't. She was receiving roughly $5,000 a month in pension income while her aged care costs were closer to $6,000. Without another source of income, her capital would gradually erode.

The objective wasn't to maximise returns. It was to generate a reliable income stream while preserving capital as much as possible. We calculated that a portfolio yielding above 5% would comfortably cover the shortfall, with any capital growth simply being a bonus.

We looked at the usual suspects: bonds, high-interest cash, domestic dividend ETFs and global income strategies. But after years of yield compression, it was difficult to build a diversified portfolio yielding much more than 3-4%. Adding to the frustration, many ASX-listed income ETFs only distribute quarterly or semi-annually, whereas bills are due monthly.

The solution ended up being one I suspect many Australian investors and advisers still overlook: covered call ETFs. By incorporating them into the portfolio, we lifted the portfolio's yield to around 6% while maintaining broad diversification.

It's now generating an average of $1,300 a month in running income, while global shares have also delivered capital growth. So far, it's done exactly what we needed it to do.

That experience reinforced something I've increasingly come to believe: Australian investors are judging covered call ETFs against the wrong benchmark - and, in doing so, overlooking a strategy that can solve a very real problem.

Covered call ETFs explained

To understand covered call ETFs, it's worth looking at where they've enjoyed their greatest success: Canada.

Today, covered call ETFs are one of the fastest-growing segments of Canada's trillion-dollar ETF market, accounting for ~6% of total assets. Investors can choose strategies covering broad share markets, technology companies, healthcare, gold miners, physical silver and even individual companies such as Royal Bank of Canada and NVIDIA.

Olivia Li, Portfolio Manager on the ETF team at the Bank of Montreal, says the strategy is much easier to understand than many investors realise.

"A covered call strategy is where you own a stock and sell a call option over it. That option gives someone else the right to buy your shares at a predetermined price before a specified date. In return, you receive a cash premium.

"Think of it like owning a house that's worth $1 million. You want to keep living in it, but you'd also like to generate some extra income. So you agree to give someone the option to buy your house for $1.2 million in a month's time, and they pay you $10,000 upfront for that right.

"If the value of the house stays below $1.2 million, you keep your house and the $10,000 premium. If it rises to $1.25 million, you've still made money — you've sold the house for $1.2 million and kept the $10,000 — but you've given up the final $50,000 of upside."

In essence, covered call investors deliberately exchange some potential future capital appreciation for additional income today.

Whether that's a worthwhile trade-off depends entirely on what you're trying to achieve - and that's where the debate begins.

The biggest criticism

Ask almost any adviser, fund manager or experienced investor what the downside of covered call ETFs is and you'll receive the same answer.

They usually underperform a traditional index ETF during strong bull markets.

Andrew Wielandt, Director of DP Advisory, doesn't shy away from that reality.

"Covered call strategies allow us to generate better-than-normal equity income, but investors need to understand the trade-off," he says, pointing out that ASX covered call ETFs yield around 7-8%, compared with roughly 3.5% for the Australian sharemarket.

He says investors can become overly fixated on distribution yields while overlooking total return. 

"You do end up with a higher income component but at what cost to overall total return over the long term? Clients tend to focus on the income number rather than income plus growth. If total return is your objective, you can simply sell part of your portfolio when you need cash."

He's right. 

If your objective is to maximise long-term wealth, a traditional index ETF will probably outperform because you're keeping all of the upside instead of selling some of it away.

But that's also where I think much of the Australian discussion goes wrong.

They're solving a different problem

Covered call ETFs aren't trying to beat an index. They're trying to solve an income problem.

My ex-partner's mother wasn't trying to outperform the market over the next decade. She urgently needed another $1,000 a month. There was no luxury of waiting for total returns to eventually compound.

Receiving regular monthly distributions while preserving as much capital as possible in the overall portfolio was a time-sensitive goal based on her circumstances.

Li argues this is exactly how investors should think about covered call strategies.

"You have to ask yourself what you're investing for. If your objective is maximum capital growth, then a traditional long-only ETF is probably the better choice," she says.

"But with covered calls, you're making a conscious decision to trade some upside for monthly cash flow, so I wouldn't compare covered call ETFs directly with traditional equity investments."

That's the key point: we're comparing investments designed to achieve completely different objectives.

Cash flow matters more than many investors admit

For some investors, cash flow is the north star.

A vanilla S&P 500 ETF might ultimately deliver superior long-term returns, but it doesn't pay investors much income along the way. For someone relying on their portfolio to fund their lifestyle, long periods of sideways markets can become frustrating because they're simply not being paid to wait.

Li believes that's where covered call strategies can prove their worth.

"A covered call strategy can generate additional income while investors wait for the sector to recover. Rather than capitulating after weak performance, the additional cash flow can make it easier to stay invested until the investment thesis starts to play out."

If monthly income helps investors stay invested through difficult markets rather than abandoning their strategy altogether, that's a genuine benefit - even if it doesn't neatly show up in a performance chart.

The argument isn't just behavioural. In his annual income ETF reviews, my colleague Carl Capolingua has consistently found that covered call ETFs rank among the most consistent income strategies on a downside risk-adjusted basis, reinforcing the case that they can play a valuable role in income-focused portfolios.

We've also seen this play out in practice. 

In June 2025, Livewire challenged Betashares and Global X to build diversified ETF income portfolios - and one year later, both had exceeded their income targets.

In both cases, covered call ETFs played a key role in lifting portfolio yields while maintaining diversified exposure to equities and other asset classes. Used alongside traditional ETFs rather than instead of them, covered call strategies can meaningfully improve portfolio income.

Equities

This ETF income portfolio delivered 7.8% and beat its yield target. Here's how

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Equities

This ETF income portfolio beat the ASX 200 and delivered a higher yield

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It's all about the objective

Covered call ETFs, in my view, deserve to be considered a category in their own right rather than simply being judged against traditional index funds.

They won't suit everyone. If your objective is to maximise long-term capital growth, a vanilla index ETF will probably remain the better choice.

But if your priority is generating dependable monthly income while staying invested in the market, covered call ETFs solve a problem that conventional equity ETFs were never designed to address.

There's another reason covered call ETFs may deserve a closer look: Labor's recent tax reforms; as a higher proportion of their return generally comes from income versus capital growth, they could be unintended beneficiaries of the new cost-base indexation rules from July 2027.

Wielandt agrees they have a place - provided they're used for the right investors.

"Overall, we use covered call ETFs for a subset of clients who want a specific income outcome - at the cost of some total return - but they don't form part of our model portfolio. Rather, we use them on a case-by-case basis for particular clients," he says.

To me, that's the takeaway. Instead of asking whether covered call ETFs outperform the market, we should be asking whether they're the right tool for the job. 

After all, isn't investment success about achieving your objective rather than pursuing maximum growth at all costs?

If Australian investors and advisers start looking at them through that lens, I suspect demand will grow. And with greater demand comes greater innovation, ultimately creating an ETF ecosystem that gives investors more choice and better solutions for their individual income needs, similar to what they have in Canada.

What covered call ETFs are available on the ASX?

Australia's covered call ETF market remains relatively small, with the category managing slightly over $1 billion in assets. The three largest products are:

• Betashares Australian Top 20 Equities Yield Maximiser Complex ETF (ASX: YMAX): The largest covered call ETF on the ASX, with more than $650 million in assets under management. It charges a management fee of 0.64%, has yielded close to 10% over the past 12 months and delivered annualised returns of 6.96% over the past 10 years.
• Betashares S&P 500 Yield Maximiser Complex ETF (ASX: UMAX): With around $290 million in assets, UMAX charges 0.79%, has yielded approximately 6.3% over the past 12 months and returned 10.74% per annum over the past decade.
• Global X S&P/ASX 200 Covered Call Complex ETF (ASX: AYLD): Managing more than $100 million, AYLD charges 0.60%, yields close to 10% and has generated annualised returns of 9.89% since it was launched in 2023.