ISPY’s Covered-Call Twist Challenges JEPI Dominance

Fans of the wildly popular JPMorgan Equity Premium Income ETF (JEPI) might soon realize there’s a new show in town in the form of the ProShares S&P 500 High Income ETF (ISPY). 

Launched on Dec. 18, ISPY is essentially jumping on the JEPI bandwagon that has made covered-call strategies among the most popular tactics over the past few years for conservative and nervous investors looking for a decent income stream along with some equity market exposure. 

Trouble is, as investors are learning, traditional covered-call strategies like JEPI do their best work in flat or down equity market environments but can lag badly during strong bull market runs. 

A good example of how funds like JEPI can benefit investors was 2022 when it held on to drop just 3.5% while the S&P 500 Index lost 18%. But the other side of the blade was revealed last year, when the S&P gained 26% while the scheduled monthly call-writing strategy held JEPI to a 9.8% gain. 

JEPI, ISPY: Covered-Call Strategy Shakeup

Simeon Hyman, global investment strategist at ProShares, said ISPY solves the upmarket challenge by tracking a covered-call index that employs daily call writing, instead of monthly. 

Daily options on the S&P, which are technically weekly options that expire every day, have only been around for about 18 months, and ISPY is the first ETF generating performance from a daily covered call strategy. 

The index ISPY tracks, the S&P 500 Daily Covered Call Index, went live on Oct. 5, and through Jan. 5 it has gained 9.5%, which compares to an 11% gain for the S&P and a 4.5% gain for the traditional Cboe S&P 500 BuyWrite Index that represents the monthly call-writing strategy. 

The daily covered call strategy looks even better when evaluated over the trailing 12 months when it generated a 25% gain, compared to an 18% for the S&P, and a 10% for the traditional monthly strategy. 

“We've seen covered call ETFs before, including covered call ETFs on the S&P 500, but what makes ISPY unique is that it sells calls with one day until expiration, which in theory, should boost the yield that the fund generates,” said Sumit Roy, senior ETF analyst at etf.com. 

ProShares’ Hyman describes the daily calls as “a big step up in innovation” that translates directly to investment performance. 

“With daily options, you can earn more income, but more importantly, you can participate with the S&P all month by getting another bite at the apple every day.” 

It’s too soon to tell if ISPY will be able to sway critics like Tim Holsworth, president of AHP Financial, who describes covered call strategies as “things that look good on paper.” 

“I’ve been looking at covered call strategies for the past 25 years, and you just don’t see the consistency you hope for,” he added. “We wouldn’t even look at the ProShares fund because it’s too new, but it might be a great concept if you can find somebody that can do it on a consistent basis.” 

Scott Bishop, partner and managing director at Presidio Wealth Partners, has also been soured on traditional covered call strategies. 

“They are sold by many as a great way to get additional income,” he said. “That being said, it is not good for every market cycle.” 

Hyman is convinced the daily call strategy solves the issue of underperformance in bull markets but does admit ISPY is probably not where you want to park investors ahead of a potential market pullback. 

“The legacy strategy can offer better protection in a down market, but if you were really worried about down markets, you’d probably have a sharper tool to use,” he said.  

Contact Jeff Benjamin at [email protected] and find him on X: @BenjiWriter