The new world of single-stock covered call ETFs is the latest step in the long line of ETF innovations. Before the advent of exchange-traded funds, only individual stocks traded on the exchanges. Investors who wanted to invest in portfolios of stocks were stuck with mutual funds. ETFs provide a whole new way for investors and traders to invest.

The first batch of ETFs tracked popular stock market indexes. The SPDR S&P 500 ETF (SPY) started trading in the U.S. in 1993. The Select Sector SPDRs began trading in 1998. Now, if you find an index, you can almost assuredly find an ETF that gives you investment exposure to that index.

Index-tracking ETFs are known for offering investments in the indexes with very low expenses.

Before Vanguard invented index mutual funds, all mutual funds were actively managed. The idea behind index funds was that most active managers failed to beat the market indexes, and the lower expenses of index funds would provide superior returns. Vanguard began offering index ETFs in 2001.

In 2006, ProShares launched the first leveraged and inverse ETFs. These funds allow traders to make more aggressive bets on the directions of the underlying indexes. They are for short-term traders and not long-term investors.

The first actively managed ETF was launched in 2008. That fund no longer exists; however, active management has become a significant portion of the ETF universe. I recommend actively managed ETFs for investing in certain types of investments, including master limited partnerships (MLPs) and preferred stocks.

2013 saw the arrival of ETFs that used covered call options strategies to boost income and pay attractive dividend yields. While this type of fund has been around for more than a decade, the category has taken off in the last couple of years. New option strategy funds are being launched every week, and assets in these funds have grown tenfold in the last few years.

The newer breed of covered call ETFs is not satisfied with the high single-digit yields of the older generation. There are funds offering yields of 20% up to 60%. The challenge for investors is to determine if the employed option strategy will work or will work to destroy an investor’s portfolio.

In July 2023, YieldMax launched the first single-stock covered-call ETF: the YieldMax AAPL Option Income Strategy ETF (APLY). YieldMax now has 23 ETFs covering 23 popular stocks. KURV funds offer six single-stock covered-call ETFs on popular stocks like Apple, Amazon, and Netflix. The YieldMax funds have especially caught the attention of investors with distribution yields that have exceeded 100%.

New option strategy and single stock covered call ETFs are launched every week. It takes four to six months of track record to see how well each fund performs. Investing in these funds requires more information than just picking them by quoted yields.