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Covered Call ETFs Chase Income as S&P 500 Yield Nears 1%

BY | ETF Database
9:26 am ET 10/26/26 | 24 VIEWS
Stock investors hunting for income are getting less of it as companies increasingly favor share buybacks over dividends. The S&P 500’s dividend yield has hovered near 1%, according to a new State Street Investment Management report.Key Takeaways: XLKI posted a 17.8% dividend yield over the past 12 months, while its underlying tech sector paid 0.4%. Option premiums have historically supplied more than 80% of the average dividend yield across State Street’s premium income suite. In a tech selloff through the first quarter of 2026, XLKI fell 3.8%, versus 13.3% for the sector. That yield complicates the job for advisors, wrote Anqi Dong, State Street’s global head of sector strategy, and strategist Mariola Pokorska. With clients living longer, portfolios need steady income, but also enough growth to outpace inflation. Bonds haven’t filled the gap. Their yields have swung in recent years on shifting monetary policy and rising fiscal deficits, the authors noted. Dividend-focused stock strategies, meanwhile, still pay in the low single digits. The report makes the case for State Street’s 11 Select Sector SPDR Premium Income ETFs, which add covered calls to sector stock holdings. A portfolio of the funds mirroring S&P 500 sector weights would have yielded about 15%, compared with 1% for the index, the authors wrote. See more: Energy Leads State Street Premium Income ETF Returns, Flows Each fund sells call options on its matching State Street sector ETF, collecting cash payments, called premiums, from buyers. In return, it gives up gains above a set price, known as the strike price, according to the report. The funds also pass along those ETFs’ quarterly dividends and pay out monthly. Premiums have historically made up more than 80% of the funds’ average dividend yield, according to State Street. Sector funds aim to sit between two other approaches, the report said. Broad-index covered call funds can dampen volatility, and the option income tied to it, by spreading exposure across the market. Single-stock strategies may collect bigger premiums but add company-specific risk.Tech Income Comes With a Trade-OffTechnology shows both sides of the strategy, the report said. The State Street Technology Select Sector SPDR Premium Income ETF (XLKI ) yielded 17.8% over the past 12 months, compared with 0.4% for its underlying sector. Concerns over AI spending and software disruption sank tech in late 2025 and the first quarter of 2026. The S&P 500 tech sector fell 13.3% in that stretch, while XLKI slipped 3.8%, according to State Street. Option premiums collected during the volatile period largely explain the gap. That cushion has a cost in rallies. As the AI build-out fueled tech gains, XLKI’s return since its July 2025 launch has trailed its sector by 12.2%, the authors wrote. The funds typically carry a beta, or sensitivity to sector moves, of about 0.7. Even utilities, usually a defensive sector, saw temporary volatility spikes over the past year as interest rates swung, Dong and Pokorska noted. The State Street Utilities Select Sector SPDR Premium Income ETF (XLUI ) had a 15.4% distribution yield as of October 22. Its 30-day SEC yield, based on investment income minus expenses, was 2.6%, according to State Street. For more news, information, and analysis, visit our Sector Investing Content Hub.

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