Why Investors Are Piling into Funds That Promise Not to Beat the Stock Market
After great returns last year, covered-call funds are all the rage among income-oriented investors. But their high yields aren’t a free lunch.
By Jason Zweig, The Wall Street Journal, Feb. 10, 2023
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Exchange-traded funds are generating eye-popping yields by selling options contracts. These ETFs, known as covered-call or option-income funds, also shielded investors from some of the pounding that stocks took last year. …
Covered-call funds squeeze ample amounts of cash out of stocks, and they provide limited protection against losses if stocks drop. In exchange, they preclude you from capturing all of the stock market’s gains…
They tend to do best in what financial professionals call “sideways markets,” when stocks don’t move up or down in big sustained swoops. In bull markets, these funds will trail conventional funds. When stocks fall, covered-call funds generally go down less than traditional portfolios…[end quote]
@captainccs has described how he lives off the premiums from his covered calls. These funds are managed to do the same.
In 2023, covered call funds are lagging the broader market. In 2022, covered call funds lost value (since they hold stocks to cover the calls) but less than the broader market because the premiums from the calls offset the losses from the stocks.
The funds mentioned in the article are Global X S&P 500 Covered Call, JPMorgan Equity Premium Income ETF and Global X Nasdaq 100 Covered Call ETF.
Looking at the Macroeconomics, what is the stock market likely to do in 2023?
If a recession occurs the market is likely to fall. In that case, a covered call fund won’t make money. With interest rates > 4% there’s no need to take that risk. If the market moves sideways a covered call fund might be a possible choice.
If the Fed engineers a soft landing a long stock fund would probably rise faster than a covered call fund.
Wendy