Owning Three Covered Call ETFs Is Not Diversification

An investor recently described his setup: three Nasdaq covered call ETFs and three S&P 500 ones, deliberately chosen because they use different option approaches. His reasoning was that they behave differently depending on the market, so the blend produces a steadier result than any single fund.

That is a more sophisticated position than most, and it points at something the entire category gets wrong.

Every ranking, including ours, scores funds in isolation. But if you hold three funds tracking the same index, the useful question is not how each one scores. It is whether they are actually different.

Two good funds can be the same fund

Suppose you own three Nasdaq covered call ETFs, all well rated. You have diversified nothing if all three write near the money calls on the full portfolio each month. They will rise together, cap out together, and lag together in exactly the same market. You hold one position with three tickers and three expense ratios.

Now suppose one writes partially, one replicates the index and writes systematically, and one uses a different structure again. Those three will diverge, and they will diverge precisely in the regimes where you want them to.

Same category, same benchmark, same scores. Completely different portfolios.

What actually makes two funds diverge

Three mechanical properties determine whether funds on the same index behave differently. None of them appear in a yield table, and most rankings do not surface them either.

1. Coverage ratio

The share of the portfolio the fund writes calls against. A fund writing on 100% of its notional gives up the entire top end. A fund writing on half keeps half the upside and collects half the premium. This single number explains most of the performance gap between funds people treat as interchangeable.

The effect is not subtle. Over a twelve month stretch through mid 2026, when the Nasdaq ran hard, a partial overwrite fund like GPIQ trailed the index by roughly two percentage points. A full overwrite fund on the same index trailed by around eleven. Same benchmark, same window, five times the gap. You can verify this on any total return chart.

2. Strike distance

How far out of the money the calls are written. At the money strikes maximise premium and minimise retained upside. Writing further out collects less but leaves room to participate. Two funds with identical coverage ratios can still behave differently if one writes at the money and the other writes three percent out.

3. Instrument type

Some funds write standard index options. Others use equity linked notes. The difference is not only tax treatment, though that matters in a taxable account. Standard options can be rolled and adjusted mid cycle. Notes cannot. When a market runs beyond what the manager expected, the fund with rollable options can respond and the one holding notes cannot.

The decision rule: if you want two funds on the same index to do different things, they need to differ on at least one of these three. If they match on all three, you own the same fund twice.

The regime evidence

The reason this matters is that covered call funds do not underperform or outperform in general. They do both, depending on the market, and the ordering between them flips.

In 2022, when the S&P 500 fell 18.2%, JEPI fell 3.5%. Roughly fourteen points of outperformance, produced entirely by the structure doing what it was designed to do. In 2023, the same fund captured about a third of the rally and gave most of that advantage back. Same fund, same strategy, opposite result.

Across our universe the pattern repeated. Every fund with meaningful downside protection outperformed sharply in 2022 and underperformed in 2023 and 2024. The funds that looked best in the bull years were the ones that had given up the most protection.

If your three funds all sit at the same point on that spectrum, the blend inherits that single behaviour. If they sit at different points, the blend smooths.

Why rankings cannot tell you this

A score is a judgement about one fund against its benchmark. It answers whether this fund is worth holding. It says nothing about whether it is worth holding alongside another one.

Two funds scoring 7 can be near identical. A fund scoring 7 and one scoring 5 can be highly complementary, because the weaker one protects in exactly the months the stronger one does not. Ranking position and portfolio fit are different questions, and the industry only publishes answers to the first.

This is a real limitation of scoring based approaches, ours included. We flag it rather than pretend otherwise.

How to check your own holdings

1. List the coverage ratio of each fund you hold. It is in the prospectus or the issuer factsheet. If two funds on the same index have similar coverage, you have a redundancy.
2. Check the instrument. Index options or equity linked notes. This changes both flexibility and, in a taxable account, what you keep.
3. Compare their 2022 behaviour if both existed then. Funds that fell together in a real drawdown will fall together in the next one. Many popular funds launched after 2022 and simply have no answer here.
4. Ignore the distribution rate for this exercise. Two funds can pay very different yields and still be the same bet.

Common questions

How many covered call ETFs should I own?

The number matters less than the spread. Two funds with genuinely different overwrite mechanics do more for you than five that all write at the money on full notional.

Does owning funds on different indices solve this?

Partly. An S&P fund and a Nasdaq fund give you different underlying exposure, but if both write the same way you still inherit the same option behaviour on top. The two questions are separate.

Can I just buy the highest rated fund in each category?

You can, and it is a defensible approach. But recognise what you are optimising for. The highest rated fund in a category over a rising window is usually the one that sold the least upside, which is also the one with the least protection when the market turns.

Do newer funds have a track record for this?

Mostly no. Several of the funds attracting the most attention launched in 2023 or 2024 and have never been through a sustained drawdown. Their downside numbers are inferred from a handful of mildly negative months rather than a real test.

Methodology note

Figures cited come from published total return data and are observable on any charting service. CoveredRank scores funds individually on total return, downside protection measured across negative benchmark months, upside participation measured across positive ones, distribution consistency, cost and liquidity. Full formulas are published here. Correlation between funds is not currently part of the model, which is the limitation this article describes.