REX Covered Call ETFs: 7 Key Differences & Why They Matter

Covered call strategies have become one of the most popular ways for investors to attempt to generate income from the stock market without giving up their equity positions entirely. But not all covered call ETFs are built the same way. REX Shares takes a different approach — writing options on individual stocks rather than a single broad index — and offers three thematic funds to do it.

Here are seven things investors should know about REX Covered Call ETFs.

1. REX Writes Calls on Individual Stocks, Not the Index

Many covered call ETFs write a single call option on a broad index. REX does it differently. FEPI, AIPI, and CEPI each hold the underlying stocks in their respective indices and then write out-of-the-money call options on each individual stock in the portfolio.

This matters because individual stock volatility is persistently higher than index-level volatility. Diversification dampens the index. By writing calls at the stock level, REX seeks to capture the full implied volatility of each position — which we believe supports rich option premiums and potential income for shareholders.

2. Three Funds, Three Themes — One Strategy

REX applies the same stock-level covered call strategy across three distinct thematic indices. Each fund gives investors exposure to a different high-growth sector while seeking to generate monthly income.

Learn more: FEPI · AIPI · CEPI

3. The Volatility Gap Is the Structural Edge

Option premiums are driven by implied volatility (IV)*. The higher the IV, the richer the premium. In our view, this is where REX’s stock-level approach creates a structural advantage. Consider: a broad market index might trade at ~20% implied volatility. But individual FEPI constituents like Palantir, MicroStrategy, Coinbase, and CrowdStrike routinely carry implied volatilities between 50% and 90% or higher. The relationship between volatility and option premium is non-linear and convex — meaning that jump from 20% to 70% IV doesn’t just deliver 3.5x the premium. It may deliver significantly more.

By writing calls on individual names, REX seeks to capture this volatility gap in a way that index-level strategies cannot.

*Source: “Understanding Implied Volatility,” Cboe Global Markets, cboe.com/education

4. OTM Strikes Seek to Preserve More Upside

Because individual stock implied volatility is higher, REX can write call options further out-of-the-money (OTM) while still collecting meaningful premium. This is a key design advantage.

An at-the-money or near-the-money call caps your upside almost immediately. A further OTM strike gives the stock room to appreciate before the call kicks in. The result is a strategy designed to help balance income generation with equity participation — not one or the other.

5. Monthly Distributions, Designed for Income Seekers

FEPI, AIPI, and CEPI each seek to pay monthly distributions funded by the option premiums collected through covered call writing. The distribution amount may vary from month to month depending on market conditions and premiums received.

Distributions are not guaranteed. They may include a combination of ordinary dividends, capital gains, and return of capital. An investor should carefully consider the prospectus before investing.

6. Tax Efficiency Through Return of Capital

For 2024, approximately 90% of FEPI’s distributions were classified as Return of Capital (ROC). ROC is a common feature in covered call ETFs and can be beneficial from a tax perspective.

How it works: Return of capital is not considered income and is not immediately taxable. Instead, it reduces your cost basis. When you eventually sell shares, if held for over a year, the gains would be taxed at long-term capital gains rates (0%, 15%, or 20%) rather than ordinary income rates.

This information is not intended to be tax advice. Investors should consult with a qualified tax professional regarding their specific situation.

7. Key Risks to Understand

Covered call strategies are not risk-free, and investors should understand the tradeoffs involved.

Call Writing Strategy Risk. The covered call approach caps upside participation. In strongly rising markets, the funds will underperform the underlying stocks because gains above the call strike price are given up in exchange for premium income.

Distribution Risk. There is no guarantee that the funds will make a distribution in any given month. Distribution amounts may vary significantly.

NAV Erosion Risk. When a fund makes a distribution, its NAV typically drops by the distribution amount on the ex-dividend date. Over time, consistent distributions can reduce NAV.

Sector Concentration Risk. Each fund is concentrated in a specific sector — technology, AI, or crypto-related companies — making them more volatile than broadly diversified investments.

Derivatives and Liquidity Risk. Options contracts carry risks beyond those of the underlying securities and may be difficult to trade during volatile markets.

The Bottom Line

REX Covered Call ETFs seek to deliver monthly income by writing individual stock options on concentrated, high-volatility thematic portfolios. The stock-level approach seeks to capture more option premium than index-level strategies typically do, while OTM strikes aim to preserve more equity upside. Three tickers — FEPI, AIPI, and CEPI — give investors access to three different sectors, all with one consistent strategy.

What are the important risks and disclosures for REX Covered Call ETFs?