Covered-call ETFs' risks and costs

What happened: Over the past year, SPYI, a covered-call ETF on the S&P 500, outperformed JEPI with a 19% return versus 8%, but JEPI's low-volatility structure better cushioned market drawdowns. SPYI's SPX index options also unlocked Section 1256 tax treatment. Meanwhile, JEPQ, a covered-call ETF on the Nasdaq-100, trailed QQQ by nearly 8 points, underperforming despite its higher expense ratio. FEPI, a covered-call ETF focusing on AI mega-caps, returned 18% compared to QQQ's 29%, surrendering roughly half the underlying tech rally to its call-writing overlay. SPYI's 0.68% expense ratio costs $59 more per year than SPY, compounding to five figures over 20 years.

Market impact: Covered-call ETFs like SPYI, JEPI, and QQQI cap upside in bull markets and offer little downturn protection, trailing broad market ETFs like SPY and QQQ. Their higher expense ratios (0.68% for SPYI, 0.98% for QQQI vs. 0.09% for SPY) further erode returns. JEPI's 'monthly' income is taxed as ordinary income, not qualified dividends, and its covered-call overlay limited price gains to 8% last year.

What to watch next: Investors should monitor SPYI's and JEPI's performance relative to SPY and QQQ, respectively, as market conditions change. Upcoming catalysts include earnings reports from major S&P 500 and Nasdaq-100 companies, which could drive performance differentials. Additionally, tax reform discussions may impact the attractiveness of covered-call ETFs' tax treatment.