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Shares Magazine
The range of income-generating investments has expanded in recent years with the launch of new funds. Some investors may already know about funds labelled ‘income maximiser’, which aim to offer higher yields than standard equity income funds but potentially lower capital growth. Now, a variation of these products has arrived, and they’re all exchange-traded funds (ETFs).
Covered call option funds, as this category of product is often known, typically offer yields in the region of 7%, although this can vary widely. They combine exposure to a portfolio of stocks with an option-writing strategy. By selling call options, the fund generates additional income today, but in return may sacrifice some of the future gains if stock markets perform strongly.
Income investors might be happy with this outcome, even if it is important to recognise that these types of funds can be left behind during strong bull markets. Some of the new ETFs in this category might produce bigger total returns than traditional income maximiser funds if they often don’t go in as deep with call options, but that also means they might not offer as much additional income. Here’s a breakdown of how they work.
How do coverall call options work in practice?
It is important to understand how these types of funds work. While their headline yield might seem enticing, they may not perform in the same way as standard equity funds.
Let’s say a fund buys a share at £100. The fund sells an option on that stock that gives the counterparty the right to buy the shares at £110 in one month’s time. In exchange, the fund receives a £2 fee for selling the option. If the stock ends the month below £110, the option expires and the fund keeps the shares and collects the £2 premium which helps to top up dividends to more generous levels.
If the price rises above £110, the option buyer keeps most of the upside beyond this level. In this situation, the amount the option buyer receives will depend on how the deal was structured. For instance, the fund might own £100 of a certain share but it may only sell options on £50 worth of exposure. In this case if the share price rises to £120, the fund would enjoy the full upside on half of its holding but is capped at gains up to £110 for the other half.
If the option agreement works in the buyers’ favour, the option is exercised and the counterparty buys the shares from the fund. However, that doesn’t always happen. Often, you’ll see the fund buy back existing options before expiry, sell new options for the next month, and settle any gains and losses in cash.
How do traditional fund and ETF versions differ?
Schroder Income Maximiser is perhaps the best-known example of a traditional fund that follow this strategy. Launched 21 years ago, the fund has £933 million assets under management and aims to deliver 7% income per year from a portfolio of UK companies. The charges are 0.9%, approaching the higher end for actively managed funds.
The newer breed of covered call option funds includes JPM Global Equity Premium Income Active UCITS ETF. This has a 0.35% ongoing charge, currently yields 7.4% and currently has £1.1 billion of assets under management.
It invests in a portfolio of shares from around the world and sells equity and/or equity index call options to generate additional income.
This is an actively managed portfolio. The principal differences versus a traditional income maximiser fund are the charges and the investment structure. The ETF trades on a stock market and its price can change throughout the trading day instead of being priced once a day like a traditional fund.
Some of these ETFs are actively managed, while others are passive and track an index. Examples include Global X S&P 500 Covered Call UCITS ETF which has a portfolio designed to match the performance of S&P 500 index and it also seeks to replicate a ‘buy-write’ index by selling covered calls. It charges 0.45% a year and has £157 million of assets under management.
Both the JPMorgan ETF and Global X ETF only launched three years ago, and fund performance is typically judged on a longer time frame. Markets have generally done well during much of those three years which means it is normal to expect a level of underperformance.
As mentioned at the start of this article, the price for achieving higher levels of income is giving up some of the gains in a rising market. Investors shouldn’t expect them to show significant outperformance. These funds are bought primarily for the generous income stream, and capital growth is a secondary consideration.
The figures speak for themselves. JP Morgan Global Equity Premium Income Active has achieved a 17.6% total return since launch in December 2023 including dividends versus 58.1% from the MSCI World benchmark index up to 19 August 2026, according to FE Analytics data. However, the current 7.4% yield is approximately five times better than you’d get directly from the benchmark.
Global X S&P 500 Covered Call has returned 29% since its launch in July 2023 versus 60.7% from the S&P 500 – but again, its dividend yield is far superior to the 1% currently offered by the US benchmark index.
Investors should carefully consider their financial goals, risk tolerance, and the role these products might play in their portfolio. Whether opting for a traditional income fund, an income maximiser version or exploring the newer covered call ETF options, the key is to ensure the investment aligns with your overall strategy and long-term objectives.
Dan Coatsworth: Head of Markets
Dan Coatsworth is AJ Bell's Head of Markets. Dan has been with the company since December 2012 and has more than 18 years' experience in the industry, following the markets and all things investing. He...
