Norman Simpson
Options income ETFs, the covered call and buffered funds that promise smoother rides through choppy markets, have swelled to roughly 120 billion dollars combined in assets as of 2025, drawing in investors who want derivatives style payoffs without having to learn what a call or put actually is.
The pitch is simple: hand over a slightly higher fee and let the fund manager handle the options trading. In exchange, covered call funds send you monthly income, and buffered funds promise to soften the blow when markets fall. But newer research on both categories suggests the reality is messier than the marketing.
Covered Call ETFs and the Downside Protection Myth
About 75.2 billion dollars now sits in covered call, or buywrite, ETFs, according to an analysis of May 2025 data from the ETF Database, with these funds charging an average expense ratio of 0.80 percent. That is well above what a plain index fund costs. The mechanics are straightforward: a fund buys stocks tracking something like the S&P 500 or Nasdaq 100, then sells call options against those holdings on a rolling basis, collecting premium income each month.
The approach tends to shine in flat or gently rising markets, where a fund can pocket both a small stock gain and the option premium. It struggles when markets move hard in either direction. Research from ProShares published in May 2025 found that over the prior decade, these strategies captured only 65 percent of the market's gains during rallies while still absorbing 84 percent of the losses during downturns. That is a lopsided trade.
The pandemic crash offers a stark illustration. When the S&P 500 fell 32 percent between February and March 2020, the Cboe S&P 500 BuyWrite Index dropped 29 percent, nearly matching the broader selloff. The premiums collected from selling calls did little to cushion a fast, sharp decline, which undercuts the idea that these funds offer meaningful downside protection. They mainly trade away upside for income, not for safety.
Buffered ETFs and Their Capped Gains, Capped Losses Structure
Buffered ETF assets have grown from 4.6 billion dollars in August 2020 to 43.4 billion dollars now, with an average expense ratio of 0.77 percent. These funds work in defined stretches, usually 12 months, during which they promise to absorb a set amount of loss, often the first 10 to 15 percent, in exchange for capping how much an investor can gain, even if the market runs far higher.
The track record is mixed. Morningstar data shows buffered ETFs returned an average of 11 percent from 2020 through 2025, versus 14.5 percent for the S&P 500. They did deliver on the loss cushioning, though. In 2022, when the S&P 500 fell 18 percent, First Trust's buffer funds lost 7.7 percent and Pacer's lost just 4.0 percent, a real difference in a rough year.
The tradeoff shows up in strong years too. The TrueShares Structured Outcome January ETF, ticker JANZ, returned 18.1 percent in 2024 while the S&P 500 gained 25.0 percent, roughly three quarters of the index's return, which is typical for the category. AQR Capital analysts examined defined outcome funds in 2025 and found 90 percent of them trailed a basic mix of stocks and cash. Their conclusion was blunt: investors chasing this kind of protection might do just as well simply trimming stock exposure and holding more cash or bonds.
Valuation, Premium Income and Fee Drag in Options ETFs
Because these are strategy funds rather than single stocks, there is no P/E ratio, EPS or 52 week price range to weigh the way you would for an individual company. The relevant numbers are structural: expense ratios running up to ten times higher than a basic index fund, monthly distribution yields from covered call funds that can look attractive on paper, and defined outcome caps that limit how much of a rally buffered fund holders actually capture.
The bull case for covered call funds rests on income generation in sideways markets, useful for investors who want cash flow without selling shares. The bull case for buffered funds is the demonstrated loss reduction in down years like 2022, when the cushioning worked close to as advertised.
The bear case is just as concrete. Covered call strategies gave up much of the 2023 and 2024 rally while still taking heavy losses in the 2020 crash, and buffered funds' fees, averaging 0.77 percent, eat into returns that already lag a simple stock and cash blend nine times out of ten, per the AQR study.
Weighing Fees Against What These Funds Actually Deliver
Both fund types solve a real problem: they let ordinary investors access options based strategies without needing to understand strike prices or expiration dates. But the data on both raises the same question, whether the added cost buys enough protection or income to justify itself. Covered call funds look weakest in fast, directional markets, whether rallying or crashing. Buffered funds come closer to delivering their promised outcome, yet the AQR comparison suggests a plain allocation shift toward cash could achieve similar results without the extra fee layer.
Noah Allen
James Chavez