ProShares Income Producing ETFs Target JEPI Investors

Covered-call strategy twist aiming to take market share from category leaders like JPMorgan.

Jeff_Benjamin
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Wealth Management Editor
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Reviewed by: etf.com Staff
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Edited by: Ron Day

ProShares is aiming to capitalize on a new twist on income-producing covered-call strategies that challenges the dominance of category leaders like the $33 billion JPMorgan Equity Premium Income ETF (JEPI).

Covered-call strategies started gaining popularity about four years ago to help provide some income to nervous investors while still keeping them exposed to the equity markets.

JEPI, launched in May 2020, has grown into the flagship of the category which produces income by selling calls on an underlying index. But while financial advisors and investors have gobbled up JEPI for its income, the tradeoff with the strategy has been a lagging total return.

ProShares Adds Fuel to Covered-Call ETFs

So far this year, for example, JEPI has gained 4.4%, which compares to a 7.7% gain for the SPDR S&P 500 ETF Trust (SPY) over the same period.

The rub on JEPI and other ETFs in the category, according to ProShares, is that they use monthly call options, which was a necessity up until about two years ago when daily call options were made available.

That subtle distinction led to the creation of the ProShares S&P 500 High Income ETF (ISPY) and the $17.6 million ProShares Nasdaq-100 High Income ETF (IQQQ).

“We did this as fast as we could,” said Simeon Hyman, global investment strategist at ProShares, a Bethesda, Maryland-based firm with 144 ETFs and $65.3 billion under management.

The total return of a covered-call strategy is a combination of the income from the sale of the call and the performance of the underlying investment, which is usually a broad market index.

In a typical covered-call strategy, the investor accepts a performance ceiling in return for income on the sale of the option. If the price of the underlying index rises above the preset strike price of the call option, the seller of the option owes the buyer a payment equal to the difference between the price of the index and the option’s strike price.

“If you do that monthly, and the market goes up the first few days of the month, you’re done for the month,” said Hyman. “But if you write a call every day, that allows that strategy to generate the income you want from selling calls and you also participate in the market performance.”

So far, the strategy has proven effective, according to the performance this year of ISPY, which was launched in December and has gained 6% this year. IQQQ has declined since its mid-March launch.

A large part of the selling point for covered-call strategies has been their ability to generate income even if the underlying assets were declining. And that is a factor worth paying attention to with daily call writing. As Hyman confirmed, the tradeoff for more closely tracking the underlying index on the upside is more closely tracking the index on the downside.

“You will track more closely to the good and to the bad,” he said. “But we think that’s more of a feature than a bug, because the equity markets go up more than they go down.”

Time will tell if daily call options gains traction and lures investors away from more established ETFs.

As Morningstar analyst Lan Anh Tran explained, covered-call strategies are generally sold to investors who didn’t know they needed them, and these are still strategies best suited for choppy markets.

“An upward market is not great for call writing funds because you’re capping the potential upside,” she said.

In terms of the appeal of covered-call strategies in general, Tran described it as a "knee-jerk reaction to the yield because people see the word income in the title, but total return is an important piece, and these funds are missing out on potential gains.”

Jeff Benjamin is the wealth management editor at etf.com, responsible for coverage related to the financial planning industry. This includes writing, hosting podcasts, webinars, video interviews and presenting at in-person events.


Jeff is a veteran journalist with more than 30 years’ experience covering the financial markets. He has won more than two dozen national and regional awards for his reporting. He most recently worked as a senior columnist at InvestmentNews where he wrote about investment products and strategies, as well as the broader financial planning industry. Prior to that, Jeff worked as an analyst at Cerulli Associates where he researched and wrote reports on the alternative investments industry. Jeff also worked as a money management reporter at Dow Jones Newswires, where he covered the mutual fund industry.


Based in North Carolina, Jeff is a former Marine and has a bachelor’s degree in journalism from Central Michigan University.