Owning stocks while collecting a fat monthly income sounds like financial alchemy. Yet, that’s the premise behind the market’s latest darling – covered call ETFs.
Two popular funds, like JPMorgan Equity Premium Income ETF (NYSE:JEPI) and Global X NASDAQ 100 Covered Call ETF (NASDAQ:QYLD) have swelled to over $53 billion in assets as investors chase yields that can look bond-like or better, but arrive with the gloss of equity exposure.
The problem is timing. If buyers use these products while also betting that the bull market has further to run, it is a contradiction, since these funds trade away part of tomorrow’s upside for cash today.
Capping the Growth
A covered call fund holds equities, then sells call options against them. The premium collected becomes the income that gets distributed to shareholders. In return, the fund hands the option buyer the right to the gains above a set strike price.
