Covered Call ETFs

[roi2020]

JP Morgan Equity Premium Income ETF (JEPI) has become the largest active ETF ($29.1B AUM) since its launch in May 2020.
The fund had inflows of approximately $12.3B thus far in 2023.
Now other firms want a piece of the action.
Morgan Stanley launched Parametric Equity Premium Income ETF (PAPI).
Blackrock introduced BlackRock Advantage Large Cap Income ETF (BALI).
Golman Sachs launched the Goldman Sachs S&P 500 Core Premium Income ETF (GPIX) and the Goldman Sachs Nasdaq-100 Core Premium Income ETF (GPIQ).
Covered call ETFs may appeal to investors seeking income creation with some downside protection.
These ETFs reside in Morningstar's Derivative Income category which had inflows of $20.4B this year.

Citiwire article (may be paywalled)

citywire.com/pro-buyer/news/investors-and-fund-shops-are-piling-into-covered-call-etfs/a2429571

Morningstar also published a related article recently.
www.morningstar.com/markets/why-investors-are-pouring-billions-into-covered-call-etfs

[yogibearbull]

Covered-calls don't offer downside protection (beyond the small premium received). If they buy puts for downside protection, that would cut into call-writing premium, i.e. the fund income. Only those ETFs that are offered for hedges may use calls and puts for setting up collars, buffers, etc.

Another factor is taxes. Basically, the CGs over time get converted into call premium and that income is taxable at the highest marginal rate. So, it may be better to hold covered-call ETFs in tax-deferred/free accounts.

[roi2020]

Nov 5, 2023 18:51:12 GMT yogibearbull said:

Covered-calls don't offer downside protection (beyond the small premium received).

yogibearbull ,

Can you elaborate?
One facet of the JEPIX approach "seeks to deliver a significant portion of the returns associated with the S&P 500 Index with less volatility, in addition to monthly income."
The fund's 3-year beta was 0.63 as of 09/30/2023.
Since launch, the worst year for JEPIX was a -6.98% loss while the max drawdown was -18.33%.
The corresponding stats for VFIAX during this period were -18.15% and -23.89% respectively.

www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=65Te33yAdID3Eeaah8mH9a

[Capital]

roi2020 , a covered call writer (the seller) is giving the right to a call buyer to buy the call sellers stock at a certain price.
This does not provide any downside protection to the call writer (seller).
In the event that the price of the stock is lower than the call strike price then the call buyer will not buy the stock from the call seller.
Instead the call buyer would buy the stock on the market at a lower price.

Since they are writing covered calls on the stocks they own, they would buy stocks with a more stable price so as not to have the stock called away as often.