Chin Yi Xuan

Intro to Covered Call ETFs: How I make >10% in dividend yield investing in the S&P500

The S&P500, which provides exposure to the largest 500 listed companies in the US, is arguably one of the best investments for long-term investors.

The problem?

The dividend yield that S&P500 pays is around 1.05% - 1.35% per annum. Not so ideal for dividend investing, my go-to investing style to build low-maintenance passive income.

What if I tell you that it is possible to get >10% in dividend yield by investing in the S&P500 (which is what I am doing with my Freedom Fund)?

With this, let me introduce you to the world of Covered Call Exchange-Traded Fund (ETF)!

YOU'LL LIKE THESE:

• Introduction to the S&P500

• Guide: How to invest in Canadian-domiciled ETFs

• My investing strategies as I turn 30

• How I manage my money as I turn 30

Highlights of Covered Call ETFs:

• Covered Call Exchange-Traded Funds (ETFs) are ETFs that sell 'Covered Calls' (explanation in the next section) to generate additional income (or 'premiums') on top of the usual dividends from the ETF.

• Examples of S&P500 Covered Call ETFs are USCC.U (Canadian-domiciled), ESPX.U (Canadian-domiciled), and XYLD (US-domiciled).

• Upsides: Good Covered Call ETFs provide a balance of growth and steady cashflow through dividends. Generally, a Covered Call selling strategy can outperform when the market drops, stays flat, or goes up moderately.

• Downsides: Covered Call ETFs charge a slightly higher fund expense ratio compared to a typical index ETF. Generally, some upside might be capped for a Covered Call ETF when the market goes up too much.

• Quick verdict: Covered Call ETFs, such as the S&P500 covered call ETF, play an important role in my Freedom Fund thanks to their balance of growth and consistent dividend income.

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How does Covered Call work?

Let me show you (in a simple scenario) how selling Covered Calls could generate more income for investors:

Let's say there are 2 people in this scenario, you and I:

First of all, imagine yourself owning 1 unit of Apple share that you bought for $100.

At the same time, let's say I want to invest in Apple - but I am afraid that the price would go down.

Hence, I come to you with a deal:

Me: "Hey bro, I'd like to buy your Apple share for $120 IF the share price goes up to $120 or more next month. Whether this deal happens or not, I'll reward you with $5 now."

Let's say you agree to this deal:

Because you think that the chance of Apple share price rising above $120 by next month is slim.

Essentially, we struck a deal with the following conditions:

• Strike price (a.k.a. The price we agreed on): $120

• Deal will expire by: Next month

• Reward (or 'Premium') you'll receive regardless of the outcome: $5

What you did essentially with this deal, is a Covered Call strategy.

In other words, think of yourself selling an 'insurance' to me (someone who wants to buy an Apple share only if it goes up to $120 or more) - and you receive a reward ($5) in return.

What would happen after 1 month?

By now, you've received the $5 'Premium' from me.

Let's see what are the potential outcomes you can expect after 1 month:

Winning scenarios:

• Scenario #1: Share price drops to $98: You gain $3

  • Despite losing $2 in share value, you'd still make a gain - why? Because you received the $5 premium from me previously!
  • Also, you'll not need to sell me your shares since Apple's share price did not exceed our agreed price of $120 or more.

• Scenario #2: Share price remains at $100: You gain $5

  • Despite the muted share price, you'd still made a gain because you received the $5 premium from me previously!
  • Also, you'll not need to sell me your shares since Apple's share price did not exceed our agreed price of $120 or more.

• Scenario #3: Share price hit $122: You gain $23

  • Since the share price exceeds $120, you'd have to fulfill the deal by selling your Apple share to me at $120. This makes you a gain of $20 (Selling price $120 - your buying price of $100).
  • Also, you received the $5 premium from me previously.
  • However, you lose a potential upside of $2 as you did not manage to sell your share at market price of $122 (you have to sell it to me at $120).
  • All of the above combined would give you a total gain of $23 ($20 + $5 - $2)

Losing Scenario:

• Scenario #4: Share price drops to $150: You lose $5

  • Since the share price exceeds $120, you'd have to fulfill the deal by selling your Apple share to me at $120. This makes you a gain of $20 (Selling price $120 - buying price $100).
  • Also, you received the $5 premium from me previously.
  • However, you lose a potential upside of $30 as you did not manage to sell your share at market price of $150 (you have to sell it to me at $120).
  • All of the above combined would give you a total loss of -$5 ($20 + $5 - $30)

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Pros and cons of Covered Call:

From the scenarios above, let me compile the benefits and downsides of selling Covered Calls:

Benefits of Covered Call

• Covered Call strategy can generate additional income for investors from 'Premium' received.

• A covered call strategy can outperform when the stock you sell a Covered Call on drops in price, stays flat, or goes up moderately by the expiration date.

Downsides of Covered Call

• A covered call strategy can underperform when the stocks you sell a Covered Call on rises too much in price by the expiration date.

• You'll have to sell your shares if the share price exceeds the Strike Price.

• You are still subject to drawdown during a market sell-off.

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Introduction to S&P500 Covered Call ETFs (USCC.U, ESPX.U, XYLD)

Not sure how to execute a covered call strategy on your own?

With Covered Call ETFs, fund managers will manage and execute covered call strategy on your behalf.

Essentially, this makes generating consistent dividends from Covered Call ETFs low-maintenance by nature.

There are many Covered Call ETFs in the market that track different assets or markets, such as tech stocks, bitcoin, as well as classic indices like the S&P500 and NASDAQ-100.

In this section, allow me to show you some examples of S&P500 Covered Call ETFs in the market:

#1 Global X S&P500 Covered Call ETF (USCC.U) - Dividend Yield: 11.09%

First off, USCC.U is a S&P500 Covered Call ETF listed in Canada.

Aside from gaining exposure to the S&P500, fund managers will actively manage the covered call strategy by selling covered calls periodically to generate premiums for investors.

USCC.U
Listed in	Toronto Stock Exchange (Canada)
Listed year	2011
Traded Currency	USD
Expense Ratio	0.49%
Covered Call Strategy	Actively-Managed
Div. Yield	11.09%
Div. Frequency	Monthly

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#2 Evolve S&P500 Enhanced Yield Fund (ESPX.U) - Dividend Yield: 9.02%

Next, ESPX.U is another S&P500 Covered Call ETF listed in Canada.

That said, this is a relatively new ETF (listed in July 2023) compared to USCC.U (listed in 2011).

Similar to USCC.U, fund managers of ESPX.U will periodically sell covered calls to generate premiums for investors.

ESPX.U
Listed in	Toronto Stock Exchange (Canada)
Listed year	July 2023
Traded Currency	USD
Expense Ratio	0.45%
Covered Call Strategy	Actively managed
Div. Yield	9.02% (as of 30/4/2025)
Div. Frequency	Monthly

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#3 Global X (US) S&P500 Covered Call ETF (XYLD) - Dividend Yield: 13.32%

Not to be confused with USCC.U, which is listed in Canada, XYLD is a S&P500 Covered Call ETF listed in the US stock market.

XYLD
Listed in	US stock market
Listed year	2013
Traded Currency	USD
Expense Ratio	0.60%
Covered Call Strategy	Passively-managed
Div. Yield	13.32% (as of 9/5/2025)
Div. Frequency	Monthly

XYLD tracks the Cboe S&P 500 BuyWrite Index - an index that tracks the performance of the S&P500 with a layer of pre-set Covered Call execution rule on top.

In other words, unlike the previous ETFs, XYLD's covered call strategy is passively managed - which means fund managers will not adjust their covered call strategies regardless of market conditions.

Generally, I do not like covered call ETFs with a rigid covered call execution, as they are not able to adapt to different market conditions:

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Where to buy covered call ETFs?

Just like stocks, Covered Call ETFs are listed in the stock market and can be bought via brokerages that offer access to the market you want.

Generally, I'd think twice before investing in Covered Call ETFs listed (or domiciled) in the US due to the 30% Dividend Withholding Tax (WHT) charged to non-US residents (like Malaysians and Singaporeans).

Rather, I'd look at Canadian-domiciled Covered Call ETFs as the Dividend Withholding Tax (WHT) is half the US' rate at 15%.

Check out the guides below to learn about Dividend Withholding Tax (WHT) and how to invest in the Canadian stock market.

READ MORE:

• Guide: All you need to know about Dividend Withholding Tax (WHT)

• Guide: How to buy Canadian-domiciled ETFs

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Verdict: Propel your dividend journey with Covered Call ETFs

To wrap things up, Covered Call ETFs are investment vehicles that layer a Covered Call strategy on top of an asset or market like the S&P500.

For certain dividend investors like myself, Covered Call ETFs can be a great tool to gain exposure to otherwise low-dividend-yield assets like the S&P500, while still earning attractive dividend income.

Like what you read and have questions? Feel free to leave a comment in the comment section below and I'll be sure to come back to you!

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Disclaimers

None of the information contained herein constitutes a recommendation, promotion, offer, or solicitation of an offer to buy, sell or hold any security, financial product or instrument or to engage in any specific investment strategy.  Investment involves risks.  Investors should obtain their own independent financial advice and understand the risks associated with investment products and services before making investment decisions.

Any discussion or mention of an stocks or ETF is not to be construed as a recommendation, promotion or solicitation. All investors should review and consider associated investment risks, charges and expenses of the investment company or fund prior to investing. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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by Chin Yi Xuan