The rise of covered call ETFs has been nothing short of remarkable. In just a few short years, these investment vehicles have seen explosive growth, with assets under management skyrocketing from $18 billion to a staggering $80 billion. Investors have been drawn to them like moths to a flame, enticed by the promise of stock-like returns coupled with bond-style income and reduced volatility.
One shining example is JPMorgan’s Equity Premium Income ETF (JEPI), the crown jewel of the U.S. actively managed ETF universe. Marketed as a vehicle to capture a significant chunk of the S&P 500 index’s returns while smoothing out volatility, JEPI has garnered considerable attention and investor interest.
The Fundamentals of Covered Calls
Picture this: in the world of investing, a covered call is akin to an intricate dance. It involves writing (selling) options for underlying stocks you already own. When you put an option up for sale, you pocket the premium paid by the buyer but expose yourself to the risk of having to part ways with your shares.
When the option finally reaches its expiration date, two scenarios can unfold:
The Secrets of Covered Call ETFs
Now, imagine a covered call ETF as a well-oiled machine – an exchange-traded fund that doesn’t just hold stocks but also dabbles in writing call options against these very stocks. Think of them as the maestros of the stock market, adding a layer of complexity by selling covered call options.
Performance Pitfalls of Covered Call ETFs
However, as enticing as covered call ETFs may sound, the allure fades when we examine their performance. These funds often shine in stable or mildly bullish markets. Yet, when the market skyrockets, covered call ETFs lag behind traditional long-only ETFs. This is because the call options they sold might be exercised, leaving them at a disadvantage.
Seeking Alternatives for Income Generation
So, when it comes to covered call ETFs, tread carefully. While they may be touted as income generators, underneath the surface, they thrive on selling volatility – a double-edged sword that can slash returns during market upheavals. To navigate these choppy waters, consider focusing on dividend-paying stocks or ETFs tailored to such equities for a more stable income stream in the long run.
On the date of publication,
Tony Daltorio
did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are solely for informational purposes. For more information please view the Barchart Disclosure Policy
here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
