Covered Call ETFs Show Mixed Performance in Recent Market

The growing popularity of covered call ETFs is discussed, alongside their performance in various market conditions. Though they offer low volatility and bond-like income, their returns lag behind traditional ETFs in rapidly rising markets.

Date: 10-09-2024

AI Rating: 5

The text outlines the surge in popularity of covered call ETFs, with assets under management increasing from approximately $18 billion in early 2022 to around $80 billion by July. This growth is fueled by the appeal of stock-like price gains combined with consistent income and lower volatility.

One highlight is JPMorgan's Equity Premium Income ETF (JEPI), which aims to deliver significant returns associated with the S&P 500 Index while maintaining lower volatility. This signals investor confidence in the managed ETF strategy.

Market Performance

Covered call ETFs have shown strong performance mainly in stable to slightly bullish markets but struggle significantly during periods of rapid market gains. For example, while the S&P 500 Index has risen by roughly 14.5% year-to-date in 2024, the Cboe’s S&P 500 Buywrite Index ($BXM) increased only 10.6%, and JEPI managed barely 6%.

This underperformance underlines that covered call ETFs may limit potential upside; the stocks in these funds can be called away, diminishing returns during bullish cycles. Furthermore, when markets dip sharply, these ETFs provide little protection, as the income from option premiums does not sufficiently offset losses from the underlying shares.

Investor Sentiment

Investors maintaining a long-term strategy might perceive this information as a cautionary note against depending solely on covered call ETFs. The article suggests more stable, income-generating investments like dividend-paying stocks or ETFs as a preferred strategy for sustained growth.

Stocks: JEPI $SPX $BXM $IUXX QYLD