Covered call ETFs: how QYLD and JEPQ work and what they returned

A covered call ETF holds stocks, sells call options on the same stocks or index, and pays out the premium it receives as distributions. Many of them have a trailing 12-month distribution rate above 10%, so people look at them in place of dividends. This article covers the payoff, the rules of two representative funds, QYLD and JEPQ, this site's backtest results, and taxes for Korean investors.

The payoff: take the premium, give away the upside

The seller of a call option receives the premium up front, and if the underlying ends above the strike at expiry, hands the rise above the strike to the buyer. Holding stocks and selling calls on them (a covered call) gives this payoff at expiry.

• If the index ends above the strike, the gain stops at the rise up to the strike plus the premium. With an at-the-money (ATM) call, whose strike equals the current index level, there is no upside left and only the premium remains.
• If the index falls, the loss is smaller than holding the stocks alone by the amount of the premium. Below that, the loss is taken in full.
• An out-of-the-money (OTM) call, whose strike is above the current index level, collects a smaller premium and keeps the rise up to the strike.

This payoff repeats every month. The rise in a strong month is given away, while the loss in a weak month shrinks only by the premium. As ups and downs repeat, the price recovers less in up months and takes nearly the full drop in down months. That is the basic reason a covered call ETF's price falls behind its index.

The rules of QYLD and JEPQ

• QYLD (Global X Nasdaq 100 Covered Call ETF): launched in December 2013, expense ratio 0.60% a year. It tracks the Cboe Nasdaq-100 BuyWrite V2 Index (BXNT). The index holds the Nasdaq-100 stocks and, on the third Friday of each month, sells next-month Nasdaq-100 index calls on the full value of the holdings. The strike is the closest listed strike at or above the index level just before 11:00 a.m., which makes it effectively at the money, and the call is counted as sold at the volume-weighted average price over the two hours from 11:30 a.m. The old call is closed the day before expiry at the volume-weighted average price of the last 30 minutes of trading.
• JEPQ (JPMorgan Nasdaq Equity Premium Income ETF): launched in May 2022, an active ETF with an expense ratio of 0.35% a year. It holds stocks picked mainly from the Nasdaq-100 through the manager's data-science-driven research and puts up to 20% of net assets in equity-linked notes (ELNs). The ELNs pay the income from selling one-month out-of-the-money Nasdaq-100 index calls. According to the manager, the rolling 12-month averages since launch were 10.29% a year from option premium and 0.61% from stock dividends (gross of fees, through June 2026).
• Funds compared alongside: XYLD applies the same at-the-money approach to the S&P 500 (Cboe S&P 500 BuyWrite Index, BXM). QYLG sells calls on only about 50% of its Nasdaq-100 holdings and keeps the upside on the rest. JEPI uses the same ELN approach as JEPQ on lower-volatility large caps from the S&P 500. All five US-listed covered call ETFs named here pay distributions monthly (SCHD pays quarterly).
• Korean-listed covered call ETFs: their names spell out the structure. "Target" means the share of the portfolio with calls sold is adjusted to hit a target distribution rate. "Weekly" and "daily" mean options with one week or one day to expiry. "OTM" means out-of-the-money calls, and "synthetic" means the return comes through a swap contract.

Why the distributions are large, and return of capital

Most of the distribution comes from option premium. An at-the-money call carries a bigger premium than an out-of-the-money one, and the more volatile the index, like the Nasdaq-100, the bigger the premium. At the end of September 2026, the trailing 12-month distribution rate was 11.5% for QYLD, 11.0% for JEPQ and 0.4% for QQQ (the past 12 months of distributions divided by the as-of price).

A distribution rate is not a return. When a fund pays out more than it earns, the difference comes out of principal. Global X estimated that 99.49% of QYLD's November 2024 distribution ($0.1804 per share) was return of capital under US tax rules. The estimate is not for tax reporting, and the final classification comes on the year-end Form 1099-DIV. Return of capital is a tax classification and does not by itself mean a loss. Whether principal really shrank shows in the price. QYLD opened at $25.44 on the first trading day of January 2014 and closed at $18.55 at the end of September 2026, and over that time it paid $29.24 per share in distributions, more than its starting price.

Backtest results (as of September 2026)

Starting from $10,000 once, distributions were reinvested on the ex-dividend date. QYLD starts in January 2014 and JEPQ in June 2022 (the month after each listing), with QQQ on the same dates. Each buy and sell cost 0.15%, and taxes and exchange rates were left out. Values updated monthly are in the covered calls QYLD and JEPQ backtest.

• QYLD: $29,580 with distributions reinvested, or 8.9% a year. QQQ over the same period: $93,346, or 19.2% a year. QYLD ended below a third of QQQ.
• With distributions spent (price only), QYLD ended at $7,270 and QQQ at $84,244. The QYLD position was 27% below the money put in.
• In the 10 years QQQ rose, the average return was +28.5% for QQQ and +12.8% for QYLD, so QYLD captured 45% of the rise. In the 2 years QQQ fell (2018 and 2022), the average was −16.4% for QQQ and −11.1% for QYLD, so QYLD took 68% of the fall.
• In only one of the 12 years, 2022, did QYLD beat QQQ. In 2018, QQQ returned −0.1% and QYLD −3.1%, so QYLD fell more.
• The max drawdown was 24.8% for QYLD (February to March 2020) and 35.1% for QQQ (December 2021 to November 2022).
• JEPQ: 17.4% a year from June 2022, against 22.9% for QQQ over the same dates. With distributions reinvested, JEPQ ended at $20,044 and QQQ at $24,415. Price only, JEPQ ended at $12,424 and QQQ at $23,756.
• In 2023 to 2025, the full years JEPQ has existed, it captured on average 75% of QQQ's annual return (66% in 2023, 97% in 2024, 73% in 2025). The max drawdown was 20.1% for JEPQ and 22.8% for QQQ, both in February to April 2025.

Calendar-year returns (distributions reinvested, from the last close of the prior year to the last close of the year).

An ATM index rule vs. an OTM active fund

The two funds differ in which calls they sell and in who picks the stocks. QYLD sells at-the-money calls on all of its holdings, so it keeps almost none of each month's rise. The premium is large, but the price cannot recover in up months, and it fell 27% from January 2014 to September 2026. JEPQ sells out-of-the-money calls through ELNs and keeps part of the rise, and its price rose 24% from June 2022 to September 2026. In exchange, JEPQ is an active fund whose results mix in the manager's stock picks, and it carries the credit risk of the ELN issuers. The same structural difference exists between XYLD and JEPI.

Taxes for Korean investors (as of September 2026)

• Distributions: distributions from US-listed QYLD and JEPQ are withheld at 15% in the US under the Korea-US tax treaty. In Korea they count as dividend income within financial income, and when yearly financial income exceeds 20 million won, it becomes subject to comprehensive taxation.
• Where the 20 million won line falls: at an 11.5% distribution rate, with no other financial income, about 170 million won of holdings produces 20 million won of distributions a year (before tax, at an unchanged exchange rate). By the same arithmetic, SCHD (3.2% yield) needs about 620 million won.
• Reclassification the following year: when part of a distribution is reclassified in the US early the next year as return of capital or a capital gain distribution, the US tax on that part is refunded through the broker, and the difference to the Korean rate is collected again in won (Samsung Securities notice, April 2025, for 2024 payments). Even when it is return of capital under US rules, it is taxed as dividend income in Korea.
• Trading losses: a loss from the falling price can only offset capital gains on other overseas stocks and similar assets in the same year, and does not reduce the dividend tax on distributions. A fund with large distributions and a falling price pays tax on the distributions every year, while the price drop lowers tax only when there are other capital gains.
• Korean-listed covered call ETFs: they follow Korean tax law, and the tax treatment can differ by the source of the distribution (stock dividends or option premium) and by the fund's structure, so check each fund's disclosures.

This site's backtest does not deduct these taxes. The larger the distributions, the more the after-tax amount reinvested shrinks.

Related concepts and search terms

Names to use when you look further into covered call ETFs, and where this article's numbers fit.

• Buy-write: buying stocks and selling calls on the same asset at the same time. Cboe calculates the buy-write indexes; XYLD tracks the S&P 500 BuyWrite Index (BXM) and QYLD the Nasdaq-100 BuyWrite V2 Index (BXNT).
• Overwrite ratio: the share of the holdings with calls sold against them. It is all of it for QYLD and about half for QYLG. The lower the ratio, the smaller the premium and the more upside is kept.
• Volatility risk premium: the tendency of the volatility priced into options to run above the volatility that actually follows. It is often cited as the reason option sellers expect a return over the long run.
• Return of capital (ROC): the part of a distribution that US tax rules classify as a return of the money invested rather than income.
• Upside and downside capture ratio: how much of the benchmark's rise or fall a fund followed, as a ratio. Calculated on yearly averages as in this article, QYLD captured 45% of the upside and 68% of the downside.
• Equity-linked note (ELN): a note whose return is tied to a stock or an index. JEPQ and JEPI hold the call-selling income inside such notes and carry the credit risk of the issuers.
• Put-write: selling put options secured by cash. With the same strike and expiry, the payoff at expiry has the same shape as a covered call (put-call parity).

Search terms: covered call ETF, buy-write index, BXM, BXNT, overwrite ratio, return of capital, NAV erosion, upside capture ratio, JEPQ ELN, put-write, monthly dividend ETF, target covered call.

Drawbacks and risks

• In strong years it trails far behind. In 2020, when QQQ returned +48.6%, QYLD returned +8.7%.
• It takes almost all of the fall and gives away the rise, so after a crash its price may not get back to where it was during the rebound.
• Distributions are not fixed. Option premium changes with volatility, and distributions shrink when volatility is low.
• JEPQ and JEPI, which use ELNs, carry the credit risk of the issuers, and the manager's stock picks change the result.
• Distributions are taxed every year, which cuts the reinvestment effect. When distributions are spent as living expenses, a falling price is a direct loss of principal.