INVESTING
Covered Call ETFs Tanked; Is It Time To Buy?
Here’s why I’m holding off.
Covered calls are a great way to turn shares you wouldn’t mind selling into more cash. It’s empowering to feel like you’re writing your own dividend check.
Their main limitation is capital. You might find that good covered call stocks are too expensive to buy in 100-share lots.
They also require some hands-on management. Not a lot, and certainly no charting software or fancy math, but more than a truly passive strategy.
Covered call ETFs were introduced to solve both of these problems. You buy however many (or few) shares as you like, sit back while collecting the sky-high yield, and repeat ad infinitum.
But most of them have a little…problem.
At a glance, their downside is only slightly less than their underlying index fund, their upside is far less, and you’re paying a management fee either way.
(Others like JEPI have done better, but I’m just presenting two of the biggest, simplest, and most systematic buy-write funds.)
Now, most of us don’t buy these funds for equity appreciation. We buy them for cash flow.
So, does this lackluster YTD performance mean it’s time to scoop them at 2020 prices?
Here’s why I don’t think so.
First, covered calls in general do best in a market that’s choppy enough to create high volatility and high premiums…but doesn’t move significantly up or down over multiple months.
- If it rises a lot, they miss the upside by design. After all, the point of covered calls is to trade potential upside for certain cash flow.
- If it drops a lot, they offer little protection. The premium softens the blow, but it’s no substitute for holding a put as insurance. You’ll probably have enjoyed less upside before the dip, too.
My personal take is that we’re in for a very rough market, or some remote possibility of another exuberant run. A middle ground seems highly unlikely. I don’t recommend timing the market, but I’m wary of buying funds that work best in very specific and currently improbable situations.
Second, other assets (including REITs like O and closed-end funds like RQI) seem to have better volatility-adjusted returns (e.g., Sharpe ratio) with high yields in their own right.
Even at near-2020 prices, it’s hard to see a case for the biggest covered call ETFs.
Especially when the strategy is simple (and free) to implement yourself.
And if buying 100 shares of a quality business isn’t on the table, then you’re better off waiting and saving up for the right assets, than buying “cheap” stocks or arguably inferior ETFs just for covered call premium.
I’m not a financial professional. This is purely opinion and entertainment, not advice. Do what’s right for you, and if in doubt about what that is, then it’s important to find someone who’s legally able to tell you.
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