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Covered call ETFs usually only outperform their underlying benchmark index under a specific set of circumstances. Ideal conditions would mean stocks would move sideways with relatively low volatility. That would allow the fund to capture the premiums written without call options being exercised. The sideways movement of equities would help ensure that shareholders aren't losing capital in the process.

2022 has not been that kind of environment. Volatility has been noticeably higher as the VIX has pushed above 30 multiple times. Stock prices have also been tumbling, yet covered call ETFs have held up remarkably well.

database, have posted positive returns year-to-date. They're relatively modest sized funds, so you may not have even heard of them. The year-to-date gains are small, but in this market, any positive return is a good thing!

First Trust BuyWrite Income ETF (FTHI)


FTHI is unique in how the underlying portfolio is constructed. Many covered call ETFs, such as QYLD, simply replicate the index and sell call options on part or all of the portfolio's holdings. FTHI uses an optimization process that favors the higher dividend-paying stocks in the index (in this case, the broad universe of U.S. stocks). The top holdings of FTHI and the S&P 500 look substantially similar, but you can see FTHI's preference for financials with its top 10 holdings of PNC, Wells Fargo and U.S. Bancorp.

From there, the fund will overlay a laddered portfolio of call options on the S&P 500 with expirations of less than one year, written at-the-money to slightly out-of-the-money. The notional value of calls written will be generally between 25% and 75% of the fund's assets. Today, that number is at 73%.

The collected call option premiums are certainly helping keep FTHI ahead of the S&P 500, but it's the focus on dividend payers that's putting it way ahead. Dividend growth and dividend yield are two strategies that have actually worked fairly well this year and FTHI has been able to capitalize on that trend. It has an annualized distribution rate of around 5%.

ETC 6 Meridian Hedged Equity Index Option ETF (SIXH)


SIXH operates a whole lot like FTHI in that it also uses a proprietary quantitative model to select stocks for the underlying portfolio. Within the equity sleeve, it seeks to capture the majority of the return of the U.S. stock market with less risk. The option side of the portfolio also uses a quantitative model to select those options the issuer feels offers the best opportunity.

SIXH's final portfolio of around 45 names tilts heavily towards defensives and cyclicals. Its heaviest overweights and in consumer staples, healthcare and energy, while its biggest underweights are in tech, consumer discretionary and communication services.

SIXH has quite simply been invested in the right sectors in 2022. By underweighting growth stocks, the fund has been able to avoid some of the worst losses in the market. The overweights to staples and energy, in particular, have boosted returns far above what one would expect out of the S&P 500 alone. The yield is small though. It's paid just under 2% on a trailing 12-month basis.

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