By Patturaja Murugaboopathy
(Reuters) -U.S. covered call funds are drawing robust inflows this year as investors search for higher returns and protection from broader market volatility because of continued tariff risks and geopolitical tensions.
According to Morningstar data, U.S. derivative income funds, primarily made up of covered call strategies, attracted a record $31.5 billion in the first half of this year.
Till the middle of this month, they secured another $2.5 billion, lifting the total net assets to a record $145 billion, the data showed.
Covered call funds generate income by owning stocks and selling call options on them, collecting premiums in return.
In choppy markets, like the current one clouded by macroeconomic uncertainty, these options often expire unused, allowing the fund to retain the premium as stock prices typically don’t rise enough to trigger a sale.
While gains are capped if markets rise sharply, the consistent income stream remains appealing.
The JPMorgan Equity Premium Income ETF has offered a 12-month trailing yield of 8.25%, while the JPMorgan Nasdaq Equity Premium Income ETF and the Global X Nasdaq 100 Covered Call ETF yielded 11.5% and 13.9%, respectively, well above the 10-year U.S. Treasury yield of 4.4%.
Chad Harmer, founder and chief investment officer of Harmer Wealth Management, said covered call funds have also become more accessible through low-fee ETFs and 401(k) plans.
A 401(k) is a U.S. workplace retirement plan that lets individuals invest pre-tax income and continue managing those assets into retirement.
The biggest demand is coming from retirees and conservative allocators, as these funds on average pay more than bonds and rise on concerns that broader equity markets may struggle to keep recent gains.
“We believe that the substantial rally in recent weeks has already priced in a lot of potential good news, and that investors should prepare for potential market volatility in the weeks ahead,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
Barry Martin, portfolio manager at Shelton Capital Management, said investors are embracing covered call funds not just for cash flow generation, but also to manage portfolio volatility.
“It’s a powerful shift in how we approach yield and risk management. This year, with the increased volatility, it is especially a good market to sell calls in.”
(Reporting By Patturaja Murugaboopathy in Bengaluru; editing by Shankar Ramakrishnan and Jan Harvey)
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