Covered Call ETFs Have Exploded In Popularity — Just In Time For Investors To Lose Their Money – The Average Joe
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    Covered Call ETFs Have Exploded In Popularity — Just In Time For Investors To Lose Their Money

    Noah Weidner

    May 5, 2024

    Congratulations, America: the market is on fire again! The S&P 500 has hit 16 all-time highs this year, retail investors are back, and Big Tech earnings are looking solid. But if you’ve lived through 2018, 2020, and even 2022, you’ve seen the market rise and fall through the pandemic, interest rate cycles, and trade wars.

    Now, with market and economic conditions that could make Michael Burry tweet another cryptic doomsday warning, investors are wondering: Should they cash out or hang tight? Well, this time, institutions have an alternative option on the table— and they’re eager to sell it to investors in the form of covered call exchange-traded funds (ETFs).

    Another option: Covered-call ETFs offer investors a way to hold their stocks while generating some extra cash from options trading — and the best part is that investors don’t have to mess with options themselves; the fund managers handle it all. These funds sell call options, which pay premiums and only cost investors if the market drops. The premiums collected are then passed on to the ETF holders. That’s why these funds are ideal for investors betting on a market downturn.

    • They’ve become so hot in the last couple of years that the amount invested in them has quadrupled to $69B, with two of the most popular funds, $JEPI and $QYLD, holding over $40B of the total assets.
    • Bloomberg says 75% of covered-call ETFs have been launched in the last 16 months, with heavy hitters like BlackRock ($BLK) and Fidelity Investments debuting their own options ETFs this year.

    Not all portfolios are created equal

    And whether they’re good for investors or if investors even understand them is a different story. When stocks tanked in 2022, these covered-call ETFs outperformed markets — but this year, as stocks soared, they’ve underperformed indexes by double digits. Global X’s Rohan Reddy says this is an intended side effect, since investors in options ETFs are okay with sacrificing higher returns for income. Still, investors are paying a sky-high 0.61% management fee for his Nasdaq 100 Covered Call ETF ($QYLD) despite its lackluster returns.

    • In an experiment this year, Bank of America found that selling one-month call options every day would have resulted in a whopping 24% annualized loss.
    • They suggest that “Investors who are looking for the highest total returns or just capital gains should probably look elsewhere” in a note comparing options and standard ETFs.

    Time’s not exactly on their side, either: While Susquehanna’s Chris Murphy says these funds could be great for investors expecting a market drop, most folks are better off sticking to vanilla ETFs with lower expense ratios — allowing their money to appreciate long-term. But the demand for “riskless” products keeps growing. Just look at Calamos Investments’ latest ETF filing — they’ll be the first to launch an ETF with 100% downside protection.

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