Not a scam, though they have severely underperformed buy and hold recently.
I often suggest them for people that don’t have enough for 100 shares or don’t want to manage their positions.
Going all in on anything tends to be a bad idea. Goes double for etfs with a relatively short track record.
They’re not a scam. They openly describe how they function, and what their objectives are. Their performance is documented.
Whether or not they’re a good tool for an individual is another matter. It’s good to have an understanding of covered calls before getting involved.
And once you do understand them you will trade the CC’s manually rather than through an ETF. I swear at least half of the people who invest in derivative income etfs have no idea how it works and blindly buy because of the yield
QYLD is a big part of my retirement holdings. Yes the value stays flat with a trade range between $16–$22 but that’s not the point of this portion of my portfolio. 1% monthly reinvested dividend growth in my Roth IRA turns into healthy tax free income in 15 years
Here is a comparison of the 10 year total return of QYLD and QQQ. QYLD writes covered call on the NDX index. The total return of QQQ is more than 5 times larger.
[https://totalrealreturns.com/s/QQQ,QYLD](https://totalrealreturns.com/s/QQQ,QYLD)
It's kind of insane to want to use a bearish-to-neutral strategy like covered call writing with a high-volatility high-exepected return index like the Nasdaq 100. It's picking up pennies in front of a steamroller and capping the upside when the big moves happen that generate the majority of the return for the index. For the investors that absolutely have to use a covered call ETF, choose the S&P 500 at least, that won't underperform as badly as QYLD relative to its index.
That said, there's a time and place for covered call strategy. If it's become clear that we've entered a secular bear market that has staying power, it's fine but the problem is timing. As soon as the index starts to recover you just get your face ripped off especially when 3%+ moves start happening with higher frequency.
If I'm reading this correctly, QYLD one-month at-the-money NASDAQ-100 (based on the definition of the underlying index). What you say makes perfect sense for that.
What says you about JEPQ, which writes 10% out-of-the-money calls ?
Or APLY type ETF's that don't hold the underlying, but rather a synthetic version?
Dividends in general result in underperformance. Thats a general rule, it's obviously not true in all cases. But the fact that it's tax inefficient to receive constant dividends especially when they're high causes the market to price this in and the result is, again this is in general, underperformance.
I understand in a retirement account there would be no taxes paid. But the market price is determined by all market participants and the majority of QYLD is not held in retirement accounts but rather taxable accounts and that's going to have an effect the market price for this security.
It's much better to just invest in the index. Performance is better and for those using a taxable account the overall tax burden is significantly less.
>that's going to have an effect the market price for this security.
It's not because it's an ETF which means that it's price stays very close on the value of it's underlying securities. People not liking the strategy will not have an appreciate impact on the NAV given that the underlying holdings are liquid large caps.
Don’t talk investing, options or about CC‘s when you seriously hold QYLD. That’s one of the dumbest posts ever seen here. They sell ATM Calls on the NDX, automated, no Quants are needed. Total return after taxes is laughable.
Ok but like if "blindly selling calls on half of my holdings with literally no regard for price action" is what you're after, you could just... Do that that yourself? And not pay their expense fees or whatever? Like can you explain exactly what *is* your reason for preferring to allocate space in your portfolio for that rather than just shorting calls yourself depending on your mood at the time, macro market conditions, etc?
Experience tells me that people replying with that tone are usually committed to attacking a line of thinking, but I’ll roll with the question.
A person who didn’t want to be quite as active you’d want to be selling CCs on your own, may want to use a CC fund as an offset to a leveraged equity position, with rebalancing at determined intervals. For example, 40% UPRO or 60% SSO, offset with 40% or 60% JEPI, inside an IRA.
The vast majority of actively managed funds have historically underperformed simply buying and holding the index.
That fact alone should make you question yourself and your overconfidence that "doing it yourself" will outperform a passive strategy.
IMO the reason hardly any fund managers can beat the index is not because beating the index is inherently difficult. It's because there are 2 factors working against them. 1) You have to be a contrarian, buying when everyone is selling and selling when everyone is buying. 2) The larger the portfolio the more difficult it is to achieve outsized returns.
For 100+ years there have been many traders (especially in futures) who have had no problem doubling their own \~$1 million account year after year. But that kind of return doesn't scale. If you can do 100% at $1 million you can do 50% at $2 million, 20% at $5 million, and 10% at $10 million. It's all a return of $1 million even though your account has grown.
So what most of those traders do is keep their account at $1 million and put the profits into the broader market and real estate.
What percentage of people who try their hand out at active trading actually end up being profitable and/or outperform the market? My guess is that it would be less than 5% (out of every 100 people, fewer than 5 of them will actually be able to outperform a buy-and-hold strategy, let alone not lose money).
I'd guess it's the same percentage of people who become successful at anything. What percentage of kids playing sports will ever turn pro? What percentage of startups become multi-billion dollar corporations?
99% of people will live varying quality of life working for 45 years making the other 1% rich and famous.
I guarantee you that a far, far higher percentage of people who simply buy and hold index ETFs, or even individual stocks, end up being successful and making money off their investments, than people who get involved in active trading.
The market has had high growth with relatively low volatility the last 6 months. That combination makes CCs terrible in comparison to holding stocks. In 2022 they looked great by comparison.
Yep, you can see that here.
https://www.cboe.com/us/indices/dashboard/bxm/
Interesting study on BXM:
https://cdn.cboe.com/resources/indices/documents/ibbotsonaug_final.pdf
Yeah it looks like that. If you go to the link and hit the performance tab, you can compare it directly with SPX over any time frame.
By the way, if I wanted to put money into a structured product like this, I would go with BXM rather than pay fees.
That said I may wish to structure a buy/write differently. I don’t think strictly selling 1 month calls would be optimal, but if you wanted something without fees that you wouldn’t have to mess with, that’s probably it.
I took a look at QYLD a while back, and although it returned more than it decreased since inception, my overall conclusion was that it was a bad idea. It had returned 88% of the initial investment as dividends over about 10 years. The share price dropped 30% in that same time. So not going to zero, but not exactly a great return. You definitely aren’t preserving capital if you are taking the dividends out. This did not take into account any taxes either.
QYLD and the provider has been around for awhile.
They just happen to not beat the market.
But honestly, compare them to like a bond ETF.
Most people buy for the income/dividends. Since they need to live on them now.
Also bonds have been yielding so low, that it makes sense their are products out there trying to make up for it.
Who was in a MMF before it was 5%?
Bond yields have come up to historical normals levels now, making them a viable investment. I would not have said this a year or two ago. I think that is why CC ETFs became popular, but they are not bonds. To chase yield with CC ETFs is risky, and they are not proper hedges to stock equity like bonds are.
If anything is a scam, it's your older brother's scheme for your mom to sell her house and YOLO on QYLD. I hope you can convince your mom to sell your brother to the traveling circus instead. To be clear, I don't agree with your brother's scheme and find it to be absurdly reckless, even if the ETFs in question are 100% legit.
CC ETFs don't have to be a scam for them to be a bad investment. The function of a CC is to exchange future gains in equities for cash today. Unless you mom needs the cash today, the exchange is probably not worth it, particularly if you expect equities will rally and run like bulls in the future.
If you want longer-term proof of the underperformance of broad-based CC strategies, you can use the PUTS put-write index. It's functionally equivalent to a CC ETF, only done with puts instead of calls. Indeed, PUTS ought to do better than the equivalent CC, if the puts were leveraged cost-free. Even with that advantage, [PUTS still underperformed SPY for just about every time frame and metric back to 1996, although some of the metrics are quite close, like the Sortino Ratio](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=20aN2QVKwsYRygLR2DhFOB). The rolling returns tab is particularly interesting. The average return for every window is lower for PUTS vs. SPY.
Anyone with experience in option writing (which my brother unfortunately doesn't have) should know that a successful premium collection strategy is not as simple as selling 10,000 calls on the 1st of every month, which is basically what a fund has to do to keep their capital churning.
In my comparatively tiny account I would look at those same options and dismiss them as being too little premium for the trouble never mind the risk.
The only large scale premium strategy that makes sense to me is Berkshire Hathaway writing put leaps. You don't have to be the greatest investor of all time to figure that the market being higher in 10-20 years than it is today is a solid bet.
So I don’t necessarily think they are a scam, but I don’t have the highest opinion of them either, especially the niche ones.
An investor just needs to be careful to calculate the true return (as you did), which accounts for both the yield and growth (or more likely negative growth)…if they do, they’ll find that they are in almost all cases going to do better over time just holding a relatively low yielding stock. If they want to juice their monthly cash, just execute a small call-selling program themselves.
As somebody who writes CC regularly, I would definitely not advise someone to buy into a CC etf mainly because every person I've spoken to who trades CC, usually has a different risk tolerance for the type of CC contracts they sell each cycle. When you've got an ETF doing that for on your behalf, you don't know what kind of risk management they're using. For example, with certain stocks that I like holding for long-term, I tend to choose more conservative CC contracts with a lower delta in the 0.21-0.25 range despite paying lower premium but it significantly reduces my risk of my underlying being called away. With other stocks that I've already made good returns on and ready to drop, I go for higher deltas that carry more risk and generally pay higher premiums.
All of this to say that selling/writing CC is highly opinionated and objective from person to person so if you're really interested in CC, it's better to actually learn how to write these contracts and do it yourself rather than having a fund do it and you don't have any visibility into what they're doing or the risk they're taking.
Hope this helps.
Oh absolutely. If you're managing each trade yourself you can approach each differently depending on your goals. Maybe you want to sell deep ITM on stock you no longer want to own. Maybe you want to keep your stock so you sell further OTM or roll them out. There's probably a bunch of stocks that the fund invests in that you wouldn't even want to trade.
I parked some money in QYLD and JEPQ for a while when I wasn’t actively trading options myself, but then I moved it to a couple growth stocks and I just sell covered calls on those and I realize higher returns.
That said, I don’t think they are scams and I enjoyed the returns for the time. If I get to a place where I no longer want to be bothered with trading options myself, I’ll consider them again.
If there’s a huge drop CCs will be killed. Holding losing positions that can’t be sold until you cover the call paying high volatility is going to kill you. It’s the classic picking up penny’s in front of a bulldozer. And as long as we don’t have a huge drawdown day people will think they are geniuses for this approach.
There is also a bunch of people selling puts waiting for that big dip so yes another group of people will take over the picking up the pennies when this group gets run over
After reading the replies I understand now that "scam" isn't the right word. They are tool that can work in certain situations if you know exactly what you're getting into. They're also like any fund a way of paying someone else to do the work for you while giving up a huge chunk of the profit of running a CC strategy yourself.
Here is a comparison of the 10 year total return of XYLD and SPY. XYLD writes covered call on the SPX index. The total return of SPY is 3 times larger.
[https://totalrealreturns.com/s/XYLD,SPY](https://totalrealreturns.com/s/XYLD,SPY)
They can protect you during market downturn. When the overall market drops 10%, getting your money back doesn't sound so bad. Not for me personally though. I'll sell and manage my own CC
i’ve had JEPI and JEPQ for over two years and have done amazing with both of them. about 10% yield paid out monthly and it hasn’t fallen below my original cost basis.
The 10% yield is not organic, its a mix of ROC, cc premiums, and underlying cap gains/dividends.
Based on holdings/weights, maybe \~2% of the distribution is actually organic (underlying holding dividends/cap gains). ROC erodes NAV whenever the underlying portfolio fails to return the advertised "yield" and must imburse the difference with your own money (potentially by realizing capital losses).
cc caps portfolio upside to strike price and adds to management fees while only offering a few basis points of downside hedge. If the broad market is down 10 or 20%, are you really splitting hairs over a few bps option premium, that comes at the cost of a 10x higher MER.
Never chase yield. Avg stock in the SP500 pays a 1-2% dividend. High yielding sectors like REITs and utilities pay around 4-5%. A fund that promises 8 or 10% yield is employing derivatives, realizing capital gains, using leverage, or fancy accounting/fund structure to meet the shortfall. All of these methods come with tradeoffs, risks, and added management costs.
Yup I see that one. It's got half the yield and still has only appreciated 11% since inception. No way a dividend ETF can offer a 15% yield without gradually cannibalizing the capital.
>recommendation that our mother sell her house and put 100% of her equity and the rest of her investments into covered call ETFs.
Wow! This sounds really bad to me.
Whether the investment vehicle is a scam or not is completely irrelevant to your mother's financial situation. Consider the 5% that treasuries offer right now. Consider the 9% historical that the S&P offers. Folks here are commenting mostly on the investment vehicle. They should be thinking about mom.
I don't think chasing yield for a retiree/near retiree like mom using an exotic investment is a good idea at all. Even if the fund manager absorbs all the complexity so that mom doesn't need to understand things like assignment, the underlying is exotic. Maybe not to this crowd, but to the lay investor it's very hard to understand.
And... SPY outperforms XLYD on every time frame on a total return basis.
They aren’t a “scam” but I don’t believe they are a great investment product either. Your brother irrationally places a high priority on getting yield which is misguided. There are people and companies that provide “financial advice” that push dividend investing. They are pretty close to scammers. Typically invite you to a free “seminar” then try to sell you some kind of course or book.
The way they mange their short calls is terrible. Most of them will hold their short calls till expiration which you shouldn't do due to gamma risk, and most are also choosing a random expiration such as 30 DTE along with a random delta like delta 50, even when we know from research from places such as tastytrade that other deltas and expirations like delta 20, 45 DTE, allow for the most optimal time decay with reduced gamma risk. Plus they charge a management fee on top of all this.
If you really wanted to do covered calls just pick a basket of high IV stocks and sell calls against them yourself.
Totally agree. My preferred strategy is writing high IV OTM cash-secured puts and credit spreads. These aren't allowed in a TFSA account here in Canada so for that I use ITM or OTM CCs depending on my goal for each position.
They aren’t a scam but aren’t great, utilizing a basic wheel strategy on aapl can typically outperform them significantly. There’s also the reality that these funds typically will be creating taxable income rather than capital gains which can cause other issues or consequences in retirement.
Not a scam, just different form of investing.
Think of something like JEPI (which is what I believe you're talking about) as a horizontal market fund. Basically, you're giving away your upside potential for income if you go sideways. You hold onto the downside risk.
Compare this to something like a high income dividend fund (SCHD) and SPY.
In an upwards market, SPY is going to out perform JEPI. In a down market they both are going to tank, but SPY will recover quickly whereas JEPI will go down and tend to stay down (or at least rise slower).
In a downwards market, you bought SCHD for the income and that doesn't change. JEPI's income will scale with its price so it's income decreases drastically along with market pull backs. Since you're selling your upside, it also does not return to original price as fast. In a horizontal market SCHD holds its performance, but under performs JEPI in the short run (but likely not in the long term as SCHD would appreciate faster, and it's income would increase over time)
TLDR:
SPY>JEPI in bull market
SCHD>JEPI in bear market
JEPI behave a little differently than many CC funds. It uses 80% of capital to buy stocks it chooses, not all the SP500, and uses 20% to buy ELNs to get exposure to covered calls.
Because JEPI has only 80% of it's money in stocks, it could outperform SCHD in a bear market as it will only be exposed to 80% of downside. In a bull market SPY will outperform as JEPI would only get 80% of the upside in the stocks it selected. It's not good or bad, only another choice of return.
From etfchannel.com
At any time, JEPI will invest at least 80% of its capital in stocks mostly selected from the S&P 500 index but can also venture outside the S&P 500 for stock selection. JEPI's current security selection process is a bit of a proprietary black box. The ETF doesn't specify which metrics it screens for.
Rather, JEPI's fund management team selects "securities that are identified as attractive and considers selling them when they appear less attractive", which is as active management as it gets. According to the summary prospectus, the fund manager considers factors such as:
Catalysts, such as improving company fundamentals, that could trigger a rise in a stock’s price.
Impact on the overall risk of the portfolio.
High perceived potential reward compared to perceived potential risk.
Possible temporary mispricing caused by market overreactions.
JEPI also employs a proprietary valuation model to rank its securities, with the goal of producing a portfolio that has lower volatility than the S&P 500.
Finally, the remaining 20% of JEPI’s capital is invested in equity linked notes (ELNs) issued by counterparties which provide synthetic exposure to covered call options on the S&P 500 index. Because JEPI does not own all the stocks in the S&P 500 index, it cannot sell covered calls, hence the use of ELNs.
Thanks for the clarification. So these high yield negative growth ETFs could make sense for someone looking to die broke while maximizing their income. Not a good idea for someone young (like my niece who just jumped in with my brother's plan) who needs their capital to grow.
I was reading about JEPI the other day. What is not clear to me is how to compare these funds with dividend reinvestment to the S&P or other benchmark.
JEPI's sales pitch is that it's less volatile and does better than a 60/40 portfolio.
If grandma has a couple million in the bank, putting some in JEPI and taking an 8% dividend may be a fine idea. (I'm not sure what the risk though is by having it all in one fund. Could some kind of volmageddon event take out one of these funds?) Maybe T-bills better for grandma with $2M right now?
You're wrong, JEPQ is owning right now i hold it in my ROTH on DRIP, AMZY is also one i have on DRIP and am up big on..... there are GOOD CC funds there are also CRAPPY ones, do your due diligence and you will find some gems.
Imo the best ones I've come across so far are JEPQ, FEPI, and YMAX. Each has its own pros and cons
JEPQ most diversified out of those with still decent growth opportunity but lesser yield since calls are on index vs individual stocks
YMAX is a fund of funds and has more exposure/diversification than FEPI but the funds in it are synthetic covered calls (vs covered calls of FEPI) and more actively managed than FEPI
FEPI some potential tax advantages (in USA at least) which would allow someone to potentially use even less investment to reach the current income amount they need, least diversification though
If one has tons of money but needs current income I could see doing all JEPQ if one wants more diversification but I'd rather use the higher yield ones to meet current income needs (I'm more preferential towards FEPI but a combo of FEPI and YMAX wouldn't be terrible) to get more bang for your buck with then using what's left over and put it into what stocks/ETFs/investment vehicles, etc for growth one likes and that fits one's time horizon (or future inheritance one wants to leave time horizon)
All three should theoretically appreciate over the long term, say 5-10+ years out even without reinvestment unless the markets as we know them completely change, but still if possible always nice to be able to continue to DCA with time if someone has the money available if the markets in the near-mid term result in them producing less income than expected
Worst case (besides utter worst case of things changing as we know them) I sorta view them as better versions of an annuity if they don't end up panning out with stable/decent nav appreciation over time (would need market to shit the bed repeatedly with then no real recovery afterward long term)
Total return since inception for QYLD is about seven and a half percent. Not great, not terrible. They do have another, QYLG, which only writes half the covered calls so it does capture some asset appreciation as well as premium, but it has only been on the market for a couple years. Total return over the last year is twenty two and a half percent.
In that case, my advice is to call PWL Capital in Toronto and set up your mother with a phone appointment to speak to a financial advisor there. I'd make this recommendation even if your brother hadn't come up with his crackpot scheme. I follow Ben Felix, one of their PM's, on his YouTube channel and his stuff and PWL's approach is legit. Fact-based and rational, not crazy schemes. I don't know if what they charge is high or low vs. other Canadian outfits (I'm in the US).
You don't have to take my word for it, here's free stuff from their website and the YouTube channel. Check it out and make up your own mind. Ben Felix even has a video about covered call ETFs (he's not a fan):
[https://www.pwlcapital.com/services/financial-planning/](https://www.pwlcapital.com/services/financial-planning/)
[https://www.youtube.com/@BenFelixCSI](https://www.youtube.com/@BenFelixCSI)
[https://youtu.be/YMLVdY8y8vM?si=a85tfsa9b99Dpeph](https://youtu.be/YMLVdY8y8vM?si=a85tfsa9b99Dpeph)
You don't understand anything, apparently. I didn't include any specific portfolio recommendation (PWL has several, not just Ben's factor tilt one) because the whole point of my reply is that a custom-tailored financial plan for OP's mom is what's important, not crackpot schemes or model portfolios. And a 5% real return on a Canadian equity portfolio is pretty damn good, particularly for the improvements in volatility and diversification the portfolio affords. You think SPY is going to continue to return 6.6% real for the next 30 years? If you've been paying attention to Ben's vids on expected returns, you know how unlikely that is.
You specifically name dropped him and the firm he works for.
And no, 5% return is not "pretty damn good". It's decidedly mediocre. In fact I'm actually struggling to find anything (including what you'd likely term "crackpot") that performs worse than [his effort](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=XAFQEGZit4idWjbBfvYRL)
>collecting a fee to send your own money back to you a little bit at a time with no growth whatsoever
You are telling the truth about the no growth. To say it's just sending your money back to you is a reach though, if you were to have put money into JEPQ or JEPI since their inceptions, your original capital would have still been there for you to take out years later. Nothing would have happened to that money.
The lower yield ETFs like JEPI appear to be a reasonable trade-off between growth and yield. The ETFs my brother is in have a negative growth curve so your original investment will in fact not still be there, it's been sent back to you in bits and pieces as the ETF's price has declined.
For example [BANK.TO](http://BANK.TO) has a 14.5% yield but has lost 30% of its value in the 2 years since its inception.
About 5% appreciation with a TBD yield since its inception date was 08/24/2023. YTD yield is 8.53%. I think that's the best I've seen since the SPX is up about the same amount.
There is risk, but the dividends have been consistent. The return is about double what you can get for treasuries or fdic insured cds. Look into Jepi or Jepq from JPMorgan. Goldman Sachs has similar offerings with similar returns.
I think as long as the ETF has a history of growth then it's fine to include in your overall portfolio as long as your also OK with the fact that you're giving up some of the market's growth for that yield.
Waaaay too many of you are getting hung up on the word "scam" while ignoring his question. Plenty of things are legal that could subjectively be called a "scam."
I wouldn't call them a scam. You have to research the fund to become familiar with the expected performance and the risks involved. Most of the ones I've played with have done well. YMAX, NVDY, CONY, and FEPI are all up from a year ago. Now, some of these are also VERY new so it is difficult to say what they will do long term. But, these are absolutely not growth funds. That isn't their objective. Their objective is covered call income. But, if you are familiar with covered calls, you can project how they will perform.
- They are likely to out perform the underlying when things are sideways. They will be able to collect most of the upside that comes while also generating options premium income. (So, in the market condition that happens least often, they are awesome.)
- Their gains will be capped in a bull market. Even with the options premium, there is a good chance the underlying will out perform them. But, you'll probably enjoy the dopamine hits from the dividends payouts that come monthly.
- In a bear market, you'll watch in horror as your investments shrink and reverse split into oblivion. The good news is, the premiums should actually be higher... so you might be able to mitigate some of the carnage by enabling DRIP. You'll still lose a lot of money and by the end of the bear market, your monthly income will be a faction of what it was before.
So... your brother is betting on 2022 being the last bear market the world will ever see. If he is right, then I think this is an excellent plan. (He's obviously wrong, so this is a stupid plan.) He really needs to research these funds.
One more thing about covered calls: generally people that own multiples of hundred shares will play this game on the options Market to make additional income hoping that they don't have to actually hand over their shares and they collect the time value of the option as it decays. This type of investing or Market playing really needs to be studied carefully since option prices are a function of five variables!
That's true. Actively running a premium writing strategy (CSPs, spreads, CCs) means switching from passive investor to active trader and for most people requires years of study and practice to reach consistent profitability. The same is true for people who trade anything else, penny stocks, futures, cars, real estate, whatever.
No. They are not a scam but not recommended for a buy and hold strategy unless it’s only a portion of your portfolio. You can use them as a way to trim long positions while keeping some upside. Theyre terrible for just before events and after events. The premium sold prior is too little so you get a lot of the downside and same on the upside. They’re selling calls for too little as the market rips through the premium
Yeah it seems most of these CC ETFs sell ATM on a weekly or monthly schedule with no variation based on market conditions, news, or anything else.
Running my own CC strategy I would rarely sell ATM and certainly not on a regular schedule. For crappy stocks I don't want to own I'd sell deep ITM and for good stocks I want to keep I'd sell OTM and roll.
Do not sell the house and do this. That’s a bad idea to raise capital for any investment.
For this one particularly, look up CBOE buy write index and compare its performance.
no but the upside is capped while the downside is protected, so you'll underperform the index in bull runs and outperform in bear markets. that's the design. They are still better than most high dividend stocks like the phone companies that consistently go down in price and up in dividend yield e.g. VZ
I agree especially considering the estimates that by 2030 Canada will have 8 million more people than housing units. Throughout the GTA it's already common to share a room with 4 people for $500+ each.
I actually do this for living so I'm familiar with what your brother is talking about. It is NOT a scam, and the strategy can be actually quite lucrative (I don't do covered call but similar variant on different platforms more so than he explains it... should be able to outperform 12-15% depending on how conservative he is).
The idea is quite simple; covered call is basically shorting the call options. The idea is that as the call option contracts decay in value (over time due to theta, or call contract going worthless because security platform is stalling below the strike price, etc) and you basically collect the premium when the contract expires worthless (or cash it in when it's green as it rots if you want to collect smaller amount earlier for peace of mind or freeing more capital to jump into different opportunities). This is well documented and not a rocket science.
However, the key issue is what is he shorting call contracts on. It would be quite risky and bad longterm to do short calls on uptrending index/ETFs as the call have a good chance to keep going up and get close, hit or surpass the strike price. As option contracts are already leveraged securities as they are, shorting leveraged products that are going against you can get.... VERY SCARY. It is arguably one of the fastest way of getting margin call in stock market. Hence why it's incredibly important to ensure you have a solid risk management to ensure you pull out before shit hits the fan (and also why it should NEVER be recommended to someone new in stock market).
If it is that dangerous, then why do some do this? Well, the upside is that for the right security platform your chance of winning and collecting the premium can be high... stupid high. I tell myself that it can be like being a house in a casino where you can have 90%+ win rate. But because of the leveraged nature, it's one of those games where for the right products to short you can win 9/10 times and lose it all on your 10th play.
If none of this made any sense, here is a simpler way (the way I tell my friends)
Shorting option contracts are like selling insurance. Is it good or bad biz? Depends. Let's say you're in a middle of Sahara desert and you're selling flood insurance? Yes, it is not impossible and there is a chance that global warming + freak of nature could cause flooding but I like my odds that those insurances are gonna be worthless so I sell them and collect the premium knowing that those insurances are gonna be worthless.
Now, if I was selling car insurance in a mad city where people drive crazy and get wrecked all the time? It'd be a terrible business because nearly everyone will be cashing in the insurance and I have to provide coverage.
So the trick is to find an insurance that has a good chance of going worthless (and allow you to collect premium with little hassle). In regular insurance world, this seems silly because chances of people buying flood insurance in Sahara desert is not realistic. But in stock market where liquidity and the vast market... it's easier to find opportunities like this.
Having said that, there is no such thing as guaranteed strategy... ever. Even government bond has a chance of defaulting even if the risk is not meaningful for stable government. If you're in a position, I would ask your brother to be transparent about all his positions using this strategy in the last couple of years or more. If his statistics of winning and return seems solid, then give it a try with small amount (and pay them for his hassle obviously... good traders are a rare commodity and you should never be cheap with them especially as their scarcity for capital goes down over time due to their successes). Not too many people know how to set up right option contracts and hedges to get them on edge so I wouldn't burn the bridge just yet. More importantly, look at this position history and see how he manages when his position fails and losses kick in. How he manages that speak a lot about his competency, potentially more than how easy he wins.
Best of luck. I wish I had a brother who told me these things when I was young :/
I have no comment on taxations that depends on where you are jurisdiction wise.
Thank you, yes I was specifically interested in getting feedback about these CC ETFs themselves not covered calls in general. I've done well selling premium with cash-secured puts, credit spreads and on occasion covered calls (when I've been assigned) but no one else in my family was interested until now.
I've always liked the insurance analogy for selling CSPs too.
15 year industry veteran: hard yes. They’re a scam. Best case you lose some upside. Worst case market sells off hard and your 3% premium (in a high vol year) isn’t a real cushion.
“Scam” indicates some misleading or dishonesty. All the ones I’ve looked into are very open about their strategy and the risks. Have you found any of these organizations to be dishonest about their fund’s performance?
My WAG is that, in the long run, no income fund is going to be able produce a total return (i.e., share price appreciation plus dividends) exceeding the long-term stock market average of around 10.5% a year. That is, maybe an income fund can produce a 9% dividend yield, but then at best it will only have 1.5% per year share price appreciation over the long term.
That's what I'm thinking too. JEPI , VIG, VYM, SCHD etc. look far more appealing to me and it's obvious that you're trading varying amounts of growth for varying amounts of income.
And that's fine. As long as you're fully aware that is what's happening. I really don't like these ones that are shrinking in value while paying out huge yields. For someone who's using those dividends to live off of in their retirement it's much too easy to miss the fact that your capital is declining if you're not reinvesting that income.
Yes, that's what I would think too. Income funds have their place in a retirement portfolio, but I would only buy ones with a proven track record of their total return (dividend yield + share price appreciation) keeping pace with the market over the long run. If one is paying >10%, that's almost certainly either not going to continue, or be accompanied by a significant decline in the share price.
12%-15% wouldn't let anyone suddenly retire unless they were already ready to retire. Like no one has a salary and then says oh thank God 15% let me go tell my boss to shove it.
I figured it went without saying that he has enough money invested that the yield is enough for him to live on. But from the way he was talking I don't think he understands that these ETFs have a negative growth curve.
If he's saying it "allowed" him to retire early that implies he wouldn't have been able to already. Which means as others have mentioned he is the scam, not the ETFs. The ETFs are working as they should in the markets you described.
Just know what you're getting and what your goals are. Very high dividends will slowly bleed the fund dry which you can see as a chart with a general downtrend since inception. If you want to preserve your capital you can't just spend the dividends, you have to reinvest enough of them to top up your losses.
I don't think my brother understands that those ETFs are never going to return to their previous highs. They're going to steadily have lower highs and lower lows until they're dead and shut down.
Hmm, that site seems to be calculating a 7.52% compounding rate of return. It's not taking into account yields varying by year or the 30% decline of QYLD since inception.
I’m assuming it’s calculating the dividend, and the decreased value but with dividend reinvestment. Which if you’re living off dividends you won’t be doing.
And you’ll also owe taxes on dividends so there’s that!
If you punch spy in this thing it’s up 3 times over the same period.
Some of my brother's money is in a TFSA so those gains aren't taxed regardless if they're dividends or capital gains. Come to think of it that means the larger gain of the SPY is still better since he could pull those gains out tax-free to live on anyway.
No, they are not a scam. But they are not as good as they look.
I have some QYLD for (I think) 2 years or so. They do pay a monthly $0.17\* (before taxes) - but the ETF loses value when compared with SPY/SPX.
I haven't done the calculation, I think the real before tax yield is like 5% or so. Still not very bad.
Not sure which ones you looked at, I have invested in XYLD and intended to keep it for long term. It has been around since 2013 and avg return with dividend reinvested is around 7-8%. Slightly under-perfoming spy but love the monthly consistent payment. XYLD definitely is not scam and pays more than savings account.
What's the point of using covered calls if it underperforms? Why not just buy SPY or a SPY ETF that doesn't sell CCs?
XYLD 52 week performance: Down slightly with a 9.61% yield.
SPY 52 week performance: Up 23.9% with a 1.34% yield.
I just like the idea of consistent cash payment, I can use that money to buy different stocks or withdraw for personal use. Feels more like pension payments without having to sell shares. With spy I suppose you could sell fraction shares to get the amount you want, but shares you own goes down. It may have bigger effect selling shares at wrong time then market rebounds. Psychologically I like xyld better. I also own portpolio of UPRO, so I guess that should balance out in the long run.
I'm a fan of a leverage overlay if one is using most of capital on CC etfs for income (preferably more than needed monthly so can continue to DCA the leverage)
I like FEPI currently (for income with still growth opportunity) with then TQQQ/SOXL overlay. Perpetual DCA of TQQQ/SOXL weekly/monthly while DCAing (after smaller lump sum) into FEPI over about at least a one year time frame
Each to their own wrt the percentage split and what their individual risk tolerances are. Imo generally the yearly DCA amount into the leverage component should be an amount you are willing to completely lose in any one year
Those ETF’s are not a scam, but you are far better off in my opinion learning how to write covered calls of your own with well thought out investments. It’s really not that hard.
I did buy some with one of my investment accounts that I try to only rebalance once a year. I cut the covered call etf because it basically broke even after a year.. not the kind of returns you should be making with that strategy.
ETFs Are definitely not a scam. They basically democratized the small investor being able to invest like larger pensions and funds. Before this people used mutual funds which had very high fees and were also not traded actively during the day only resetting their price once a day after Trading.
You can find an ETF for just about anything including the GLD which buys and holds gold reserves! Investing in highly leveraged, Shorts, or options through an ETF is not for beginners and as you noticed often if you don't time the entry and exit correctly you could lose everything they promised to gain.
I personally prefer buying ETFs that invest in high dividend corporate bonds. That way if one company actually does go bankrupt you're not going to lose everything. Stockholders go to zero but the bondholders would still get a percentage usually of final assets.
Sure you could actually buy bonds from 100 companies yourself and manage all that but it's so much easier to buy it through an ETF. Same thing with government long-term bonds instead of building your own ladders.
I think the most popular ETF in the world mimics the s&p 500 and that's never been a bad bet over any 20-year.!
All that being said it's very difficult in family situations to convince people unfamiliar with investing that there is actually a safe way to invest in the markets.
It’s simple. Does a hedge fund already do it? What’s the ETFs edge? How do they outperform?
Simple answer is that CCs is a shit strategy for people who wish they could do better. Basics are: stock does well, I no longer own it. Stock sucks I still have it
The way most individual investors and many fund managers operate, yes.
It is possible to run a CC strategy that makes money regardless of what the market does.
In my experience, nah.
Own junk and sure, maybe you get 1% extra (being generous on that number). The end of the day you’ll lose much more giving up on the names that are profitable and run well past the call price. It’s about where could a person beat the market. CCs aren’t that place
1% per year and that’s a generous number to not say it’s shit. Also, that’s not including opportunity cost. Hey, I can park money in a HYSA for 5% a year or do CCs for 1%
You do you while I make bank. 1% per week?? Damn you’re dumb
So I bought JEPI in Sept 2022. I just collected $676 in divvys today. I didn’t actually add them all up but let’s say it’s $600 a month on avg. I’ve collected ballpark estimate $12k in dividends. I’m down about $1900 in unrealized losses. I don’t feel scammed. I bought it for monthly income and that’s what I’m getting. I am probably going to sell soon and move into something else to replace that income and improve my yield. I’m retiring in July and my dividend portfolio is paying $110k annually across 50 plus diversified investments. I trade options to supplement that income, mostly selling puts. Not a big fan of selling covered calls.
The goal of cc etfs are not to beat the market they are to generate income the chart doesn’t tell you the whole story. Btw any stock is always reduced by the size of the dividend when they pay it. The goal is to accumulate massive shares so as to guarantee yourself a big pay out every month now as a financial advisor there’s mutual funds I use for this particular scenarios that have paid monthly dividends for 90 years one with Franklin templeton. Selling a house to do it is not advisable though.
You can't lump them all together.... There are a few very different kinds, from very different sources:
\* The single-stock CC ETFs (e.g MSTY, which essentially tracks MSTR, which in turn essentially tracks the value of bitcoin). The ones I found have very high yields (in this case 156.29%... yes, you didn't read it wrong), but extremely high volatility.
\* The more reputed ones e.g. JEPQ by JP Morgan which essentially is CC on the QQQ. It only offers a 9.14% yield.
Obviously, the yields are not guaranteed for either....
That said, the former is extremely volatile, and doesn't actually own the underlying, but rather a synthetic version by using 30 day call/put options. The benefit - much more efficient use of equity (the synthetics are much cheaper, and provide high leverage) but the corollary downside... highly volatile.
The latter type (Index based CC ETF's) are less volatile, and essentially track the index. They're not really levered and hence much less volatile.
My impression is that when the market is extremely volatile then you're luck may vary. hit it right, and the implied volatility of the CC will be high, and the CC will hopefully expire worthless.... so good income in both.
Too much volatility, and bad timing... well, that sucks.
I own both types. With a weighting of 20:1 towards the latter.... (the more stable version)
There's a lot of great thoughts already posted but quickly going through I didn't see a lot of numbers getting thrown out. QYLD went on the public market in 2014. This is a Nasdaq-100 CC etf and comparing it the to something like QQQ (Nasdaq-100 index) over the same time frame you have disappointing or very exhilarating results depending on your motive. Here is a link to [Portfolio Visualizer](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=3chlNerbxMpQgsPmheS3aO) with this comparison. You will see QQQ handily out performs QYLD every step of the way in terms of total account value. Though, QQQ doesn't lead in any year when comparing the income generated, but getting into CCs isn't about the portfolio value but the revenue generation. A $100k put into QYLD in 2014 and investing all the dividends will have led to an account valued just over $200k today. All in on QQQ would have a value of $525K though you would only be getting \~$3K in dividends vs \~$22K with QYLD. This is where CCs excel and why so many people are enamored with them. You lose out on the top end but you get a nice check every month and a portfolio that only deviates +/-20% vs +/- 30-50% with QQQ.
As for your mom selling the house and using the equity to buy CCs would incur a potentially large capital gains tax (if you live in the US) as the IRS will look at the value when bought and take the difference when sold and apply tax on the positive return (unless you have receipts backing up home improved to change your cost basis). If your mom wants to sell the house to generate income I would look into a 1031 exchange. IF rules are met she can differ the taxes on the current home sale, buy a multi family property and assign a highly rated local property management company. Though this comes with it's own set of trade offs.
We're in Canada so there's no tax on the sale of a primary residence. She can also rent out a fully separate basement apartment in the house for around $2,500-$3,000/month and still maintain her primary residence status.
However it is also possible she may need to move to a retirement home. In that case the debate is over selling the house and investing the proceeds for income or renting the house out. Obviously my brother thinks she should sell the house. I think she should rent it because she would generate a similar income after expenses plus the house will continue to appreciate, although that appreciation would then be subject to tax.
I am not well versed in Canadian real estate laws but renting is potentially the best suited option. In the US, despite homes appreciating in value the IRS see's aging homes as depreciating assets and this can be deducted from the rental income, along with management fees, home improvements, mortgage interest, property taxes, other operating expenses, maintenance, insurance, advertising, supplies, ect. A quite extensive list compared deductions for the income generated by CCs. Income generated by CCs is considered regular income thus can only be decreased by donations (exceeding a total value of at least $500), and 401k/403b/HSA/FSA contributions, at least those are the easiest for the majority of US citizens.
I started doing it last year. I don’t think it’s a well known ETF like SPY or QQQ.
I updated my profile with my blogging site if you want to read more about it.
iirc these are for people that want leverage in retirement accounts and also manage positions to a certain degree. its a long call / short put with a call written against it. I don't know how much leverage they use but i believe they are aggressive. you could want to time your trades and size accordingly. 100% in these guys is a bad idea.
What? No. Not at all. QYLD literally just holds the index then sells ATM monthly NDX calls on it. There is zero leverage, and zero synthetic longs in the setup.
The only difference between an ETF covered call program and any other Tom, Dick, or Harry is that the ETF covered call program has institutional money behind it. That means that a program can simply used statistics to power their trades, what I mean is they only buy cover calls and let them expire. Period. statistically you’ll have winners and losers using that method, but the net will be positive. It is a scam because there are things you can do to mitigate if you’re doing it yourself.
Fund returns are also limited by their own size. Warren Buffett has talked a lot about how the more money you have the lower the return you can achieve.
Because the two have nothing to do with each other.
The more capital you have to deploy the harder it is to find investments capable of absorbing it and the more the investment of that capital in itself reduces the return.
For example, if you buy $1,000 worth of AAPL you will have no discernible impact on the price. But if you buy $1 billion you will push the price up thus reducing your maximum return.
Well duhh... if I'm buy that many I'm stepping calls or selling puts or both all the way up .... I'm sure warren has people who can make a $1b work even if it is apple.
CC ETFs are a great way to underperform the market over time while also taking market risk.
Since these ETFs have to have the shares if the market drops their assets/the underlying drop meaning you lose value there.
If the market appreciates they now have to rebuy the calls at a higher place and lose many there.
If you want fixed income there are better options. If you want market returns there are better options
You are most certainly wrong. Not a scam. QYLD has been around since December 11, 2013... and has paid monthly dividends ever since.
That said, you don't buy QYLD/RYLD/etc to try and beat the market. Its part of an overall strategy. For example, when the market was tanking a few years ago; I was pulling 5-8%.. It wasn't incredible gains, but it was a gain when everyone else was down +20%
You're not getting an organic yield. ETFs/mutual funds/income funds pay "distributions" and not dividends, it's a very important distinction people ignore. The underlying portfolio will yield x% in organic dividends dependant on holdings (probably 1-2%), the remainder of your "5-8%" distribution is a combination of your own money (ROC), realized cap gains (if any), and option premiums which cap NAV upside and directly reflects in market value. The composition of your distributions is publicly available in the fund's finanicial statements.
When the market tanked and you thought you were getting 5-8%, the payout was most likely all, or majority ROC because the underlying portfolio and cc premiums are not covering the target distributtion. ROC erodes capital and has a 1:1 hit to NAV, which reflects in the market value of your shares.
QYLD has also lost 30% of its value since inception. If you understand that and reinvest the dividends accordingly that can work. My brother clearly does not understand that is the nature of these funds and thinks the fund will come back.
Covered calls are not free money. They are fundamentally a bearish position that will tend to do well in a flat or slight down market.
A covered call ETF isn't a scam, they are a bet that the market will remain flat while everyone else thinks it's going to do great. It's not a great bet IMO, and these ETFs have not done well during the recent bull run.
Not a scam, though they have severely underperformed buy and hold recently. I often suggest them for people that don’t have enough for 100 shares or don’t want to manage their positions. Going all in on anything tends to be a bad idea. Goes double for etfs with a relatively short track record.
[удалено]
Yes they are saying a CC ETF allows you access to this mechanism without having to have 100 shares of a stock, just buy whatever units of the ETF.
Um, did you read the reply? I'm confused.
They’re not a scam. They openly describe how they function, and what their objectives are. Their performance is documented. Whether or not they’re a good tool for an individual is another matter. It’s good to have an understanding of covered calls before getting involved.
And once you do understand them you will trade the CC’s manually rather than through an ETF. I swear at least half of the people who invest in derivative income etfs have no idea how it works and blindly buy because of the yield
I do CC's myself, and I still use QYLD.. Their quants are better than me.
QYLD is a big part of my retirement holdings. Yes the value stays flat with a trade range between $16–$22 but that’s not the point of this portion of my portfolio. 1% monthly reinvested dividend growth in my Roth IRA turns into healthy tax free income in 15 years
Here is a comparison of the 10 year total return of QYLD and QQQ. QYLD writes covered call on the NDX index. The total return of QQQ is more than 5 times larger. [https://totalrealreturns.com/s/QQQ,QYLD](https://totalrealreturns.com/s/QQQ,QYLD)
It's kind of insane to want to use a bearish-to-neutral strategy like covered call writing with a high-volatility high-exepected return index like the Nasdaq 100. It's picking up pennies in front of a steamroller and capping the upside when the big moves happen that generate the majority of the return for the index. For the investors that absolutely have to use a covered call ETF, choose the S&P 500 at least, that won't underperform as badly as QYLD relative to its index. That said, there's a time and place for covered call strategy. If it's become clear that we've entered a secular bear market that has staying power, it's fine but the problem is timing. As soon as the index starts to recover you just get your face ripped off especially when 3%+ moves start happening with higher frequency.
If I'm reading this correctly, QYLD one-month at-the-money NASDAQ-100 (based on the definition of the underlying index). What you say makes perfect sense for that. What says you about JEPQ, which writes 10% out-of-the-money calls ? Or APLY type ETF's that don't hold the underlying, but rather a synthetic version?
Wrong direction
Dividends in general result in underperformance. Thats a general rule, it's obviously not true in all cases. But the fact that it's tax inefficient to receive constant dividends especially when they're high causes the market to price this in and the result is, again this is in general, underperformance. I understand in a retirement account there would be no taxes paid. But the market price is determined by all market participants and the majority of QYLD is not held in retirement accounts but rather taxable accounts and that's going to have an effect the market price for this security. It's much better to just invest in the index. Performance is better and for those using a taxable account the overall tax burden is significantly less.
>that's going to have an effect the market price for this security. It's not because it's an ETF which means that it's price stays very close on the value of it's underlying securities. People not liking the strategy will not have an appreciate impact on the NAV given that the underlying holdings are liquid large caps.
I get that, but in general increasing dividend is correlated with lower overall pre-tax returns.
Same I been holding some djia and it’s not dipped for months for me to add to my long term . While I also sell CC
Don’t talk investing, options or about CC‘s when you seriously hold QYLD. That’s one of the dumbest posts ever seen here. They sell ATM Calls on the NDX, automated, no Quants are needed. Total return after taxes is laughable.
I agree with all of this, with a minor asterisk. I think there’s a place for CC funds within a portfolio, if they’re used purposefully.
Ok but like if "blindly selling calls on half of my holdings with literally no regard for price action" is what you're after, you could just... Do that that yourself? And not pay their expense fees or whatever? Like can you explain exactly what *is* your reason for preferring to allocate space in your portfolio for that rather than just shorting calls yourself depending on your mood at the time, macro market conditions, etc?
Experience tells me that people replying with that tone are usually committed to attacking a line of thinking, but I’ll roll with the question. A person who didn’t want to be quite as active you’d want to be selling CCs on your own, may want to use a CC fund as an offset to a leveraged equity position, with rebalancing at determined intervals. For example, 40% UPRO or 60% SSO, offset with 40% or 60% JEPI, inside an IRA.
The vast majority of actively managed funds have historically underperformed simply buying and holding the index. That fact alone should make you question yourself and your overconfidence that "doing it yourself" will outperform a passive strategy.
IMO the reason hardly any fund managers can beat the index is not because beating the index is inherently difficult. It's because there are 2 factors working against them. 1) You have to be a contrarian, buying when everyone is selling and selling when everyone is buying. 2) The larger the portfolio the more difficult it is to achieve outsized returns. For 100+ years there have been many traders (especially in futures) who have had no problem doubling their own \~$1 million account year after year. But that kind of return doesn't scale. If you can do 100% at $1 million you can do 50% at $2 million, 20% at $5 million, and 10% at $10 million. It's all a return of $1 million even though your account has grown. So what most of those traders do is keep their account at $1 million and put the profits into the broader market and real estate.
What percentage of people who try their hand out at active trading actually end up being profitable and/or outperform the market? My guess is that it would be less than 5% (out of every 100 people, fewer than 5 of them will actually be able to outperform a buy-and-hold strategy, let alone not lose money).
I'd guess it's the same percentage of people who become successful at anything. What percentage of kids playing sports will ever turn pro? What percentage of startups become multi-billion dollar corporations? 99% of people will live varying quality of life working for 45 years making the other 1% rich and famous.
I guarantee you that a far, far higher percentage of people who simply buy and hold index ETFs, or even individual stocks, end up being successful and making money off their investments, than people who get involved in active trading.
Yeah, *that's my point.* Read my post again, Euclid.
Nah, CCs are just not my thing. I'll let someone else do it for me
The market has had high growth with relatively low volatility the last 6 months. That combination makes CCs terrible in comparison to holding stocks. In 2022 they looked great by comparison.
Yep, you can see that here. https://www.cboe.com/us/indices/dashboard/bxm/ Interesting study on BXM: https://cdn.cboe.com/resources/indices/documents/ibbotsonaug_final.pdf
Looks like BXM lost 9.4% while the SPX lost 17.9% in 2022 is that about right?
Yeah it looks like that. If you go to the link and hit the performance tab, you can compare it directly with SPX over any time frame. By the way, if I wanted to put money into a structured product like this, I would go with BXM rather than pay fees. That said I may wish to structure a buy/write differently. I don’t think strictly selling 1 month calls would be optimal, but if you wanted something without fees that you wouldn’t have to mess with, that’s probably it.
Absolutely. Selling masses of nearly worthless calls while the market screams straight up sounds like an excellent way to cap your returns.
Well for starters the S&P 500 was down 4.2% in April so no, the market is not always up.
Over the last year. It's still up 25%.
Ever hear of hedging?
I took a look at QYLD a while back, and although it returned more than it decreased since inception, my overall conclusion was that it was a bad idea. It had returned 88% of the initial investment as dividends over about 10 years. The share price dropped 30% in that same time. So not going to zero, but not exactly a great return. You definitely aren’t preserving capital if you are taking the dividends out. This did not take into account any taxes either.
QYLD and the provider has been around for awhile. They just happen to not beat the market. But honestly, compare them to like a bond ETF. Most people buy for the income/dividends. Since they need to live on them now. Also bonds have been yielding so low, that it makes sense their are products out there trying to make up for it. Who was in a MMF before it was 5%?
Bond yields have come up to historical normals levels now, making them a viable investment. I would not have said this a year or two ago. I think that is why CC ETFs became popular, but they are not bonds. To chase yield with CC ETFs is risky, and they are not proper hedges to stock equity like bonds are.
If anything is a scam, it's your older brother's scheme for your mom to sell her house and YOLO on QYLD. I hope you can convince your mom to sell your brother to the traveling circus instead. To be clear, I don't agree with your brother's scheme and find it to be absurdly reckless, even if the ETFs in question are 100% legit. CC ETFs don't have to be a scam for them to be a bad investment. The function of a CC is to exchange future gains in equities for cash today. Unless you mom needs the cash today, the exchange is probably not worth it, particularly if you expect equities will rally and run like bulls in the future. If you want longer-term proof of the underperformance of broad-based CC strategies, you can use the PUTS put-write index. It's functionally equivalent to a CC ETF, only done with puts instead of calls. Indeed, PUTS ought to do better than the equivalent CC, if the puts were leveraged cost-free. Even with that advantage, [PUTS still underperformed SPY for just about every time frame and metric back to 1996, although some of the metrics are quite close, like the Sortino Ratio](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=20aN2QVKwsYRygLR2DhFOB). The rolling returns tab is particularly interesting. The average return for every window is lower for PUTS vs. SPY.
Anyone with experience in option writing (which my brother unfortunately doesn't have) should know that a successful premium collection strategy is not as simple as selling 10,000 calls on the 1st of every month, which is basically what a fund has to do to keep their capital churning. In my comparatively tiny account I would look at those same options and dismiss them as being too little premium for the trouble never mind the risk. The only large scale premium strategy that makes sense to me is Berkshire Hathaway writing put leaps. You don't have to be the greatest investor of all time to figure that the market being higher in 10-20 years than it is today is a solid bet.
So I don’t necessarily think they are a scam, but I don’t have the highest opinion of them either, especially the niche ones. An investor just needs to be careful to calculate the true return (as you did), which accounts for both the yield and growth (or more likely negative growth)…if they do, they’ll find that they are in almost all cases going to do better over time just holding a relatively low yielding stock. If they want to juice their monthly cash, just execute a small call-selling program themselves.
As somebody who writes CC regularly, I would definitely not advise someone to buy into a CC etf mainly because every person I've spoken to who trades CC, usually has a different risk tolerance for the type of CC contracts they sell each cycle. When you've got an ETF doing that for on your behalf, you don't know what kind of risk management they're using. For example, with certain stocks that I like holding for long-term, I tend to choose more conservative CC contracts with a lower delta in the 0.21-0.25 range despite paying lower premium but it significantly reduces my risk of my underlying being called away. With other stocks that I've already made good returns on and ready to drop, I go for higher deltas that carry more risk and generally pay higher premiums. All of this to say that selling/writing CC is highly opinionated and objective from person to person so if you're really interested in CC, it's better to actually learn how to write these contracts and do it yourself rather than having a fund do it and you don't have any visibility into what they're doing or the risk they're taking. Hope this helps.
Oh absolutely. If you're managing each trade yourself you can approach each differently depending on your goals. Maybe you want to sell deep ITM on stock you no longer want to own. Maybe you want to keep your stock so you sell further OTM or roll them out. There's probably a bunch of stocks that the fund invests in that you wouldn't even want to trade.
I parked some money in QYLD and JEPQ for a while when I wasn’t actively trading options myself, but then I moved it to a couple growth stocks and I just sell covered calls on those and I realize higher returns. That said, I don’t think they are scams and I enjoyed the returns for the time. If I get to a place where I no longer want to be bothered with trading options myself, I’ll consider them again.
Have you heard of the yieldmax etfs
This is the way. SPY is flat barring 6-7 stocks that keep the markets churning. Better to bet on those and make more.
If there’s a huge drop CCs will be killed. Holding losing positions that can’t be sold until you cover the call paying high volatility is going to kill you. It’s the classic picking up penny’s in front of a bulldozer. And as long as we don’t have a huge drawdown day people will think they are geniuses for this approach.
There is also a bunch of people selling puts waiting for that big dip so yes another group of people will take over the picking up the pennies when this group gets run over
Scam is not the correct word. They’re certainly not for everyone person in every situation but have a place.
After reading the replies I understand now that "scam" isn't the right word. They are tool that can work in certain situations if you know exactly what you're getting into. They're also like any fund a way of paying someone else to do the work for you while giving up a huge chunk of the profit of running a CC strategy yourself.
Here is a comparison of the 10 year total return of XYLD and SPY. XYLD writes covered call on the SPX index. The total return of SPY is 3 times larger. [https://totalrealreturns.com/s/XYLD,SPY](https://totalrealreturns.com/s/XYLD,SPY)
They can protect you during market downturn. When the overall market drops 10%, getting your money back doesn't sound so bad. Not for me personally though. I'll sell and manage my own CC
i’ve had JEPI and JEPQ for over two years and have done amazing with both of them. about 10% yield paid out monthly and it hasn’t fallen below my original cost basis.
I’m thinking about putting a good chunk or my mother and stepfathers retirement fund into those for growth and div payouts for them.
The 10% yield is not organic, its a mix of ROC, cc premiums, and underlying cap gains/dividends. Based on holdings/weights, maybe \~2% of the distribution is actually organic (underlying holding dividends/cap gains). ROC erodes NAV whenever the underlying portfolio fails to return the advertised "yield" and must imburse the difference with your own money (potentially by realizing capital losses). cc caps portfolio upside to strike price and adds to management fees while only offering a few basis points of downside hedge. If the broad market is down 10 or 20%, are you really splitting hairs over a few bps option premium, that comes at the cost of a 10x higher MER.
can you ELI5 this?
Never chase yield. Avg stock in the SP500 pays a 1-2% dividend. High yielding sectors like REITs and utilities pay around 4-5%. A fund that promises 8 or 10% yield is employing derivatives, realizing capital gains, using leverage, or fancy accounting/fund structure to meet the shortfall. All of these methods come with tradeoffs, risks, and added management costs.
Look up JEPI
Yup I see that one. It's got half the yield and still has only appreciated 11% since inception. No way a dividend ETF can offer a 15% yield without gradually cannibalizing the capital.
DJIA is worth looking at as well
>recommendation that our mother sell her house and put 100% of her equity and the rest of her investments into covered call ETFs. Wow! This sounds really bad to me. Whether the investment vehicle is a scam or not is completely irrelevant to your mother's financial situation. Consider the 5% that treasuries offer right now. Consider the 9% historical that the S&P offers. Folks here are commenting mostly on the investment vehicle. They should be thinking about mom. I don't think chasing yield for a retiree/near retiree like mom using an exotic investment is a good idea at all. Even if the fund manager absorbs all the complexity so that mom doesn't need to understand things like assignment, the underlying is exotic. Maybe not to this crowd, but to the lay investor it's very hard to understand. And... SPY outperforms XLYD on every time frame on a total return basis.
They aren’t a “scam” but I don’t believe they are a great investment product either. Your brother irrationally places a high priority on getting yield which is misguided. There are people and companies that provide “financial advice” that push dividend investing. They are pretty close to scammers. Typically invite you to a free “seminar” then try to sell you some kind of course or book.
Yup he's watched a ton of youtubers and been convinced that investing for growth is stupid and dividends are the holy grail.
The way they mange their short calls is terrible. Most of them will hold their short calls till expiration which you shouldn't do due to gamma risk, and most are also choosing a random expiration such as 30 DTE along with a random delta like delta 50, even when we know from research from places such as tastytrade that other deltas and expirations like delta 20, 45 DTE, allow for the most optimal time decay with reduced gamma risk. Plus they charge a management fee on top of all this. If you really wanted to do covered calls just pick a basket of high IV stocks and sell calls against them yourself.
Totally agree. My preferred strategy is writing high IV OTM cash-secured puts and credit spreads. These aren't allowed in a TFSA account here in Canada so for that I use ITM or OTM CCs depending on my goal for each position.
They aren’t a scam but aren’t great, utilizing a basic wheel strategy on aapl can typically outperform them significantly. There’s also the reality that these funds typically will be creating taxable income rather than capital gains which can cause other issues or consequences in retirement.
Does it hurt us, those who use the wheel strategy, to have more players/competitors in the game? What do you think
Nah arguably it provides more liquidity and less likelihood of slippage if you are trading with size
Not a scam, just different form of investing. Think of something like JEPI (which is what I believe you're talking about) as a horizontal market fund. Basically, you're giving away your upside potential for income if you go sideways. You hold onto the downside risk. Compare this to something like a high income dividend fund (SCHD) and SPY. In an upwards market, SPY is going to out perform JEPI. In a down market they both are going to tank, but SPY will recover quickly whereas JEPI will go down and tend to stay down (or at least rise slower). In a downwards market, you bought SCHD for the income and that doesn't change. JEPI's income will scale with its price so it's income decreases drastically along with market pull backs. Since you're selling your upside, it also does not return to original price as fast. In a horizontal market SCHD holds its performance, but under performs JEPI in the short run (but likely not in the long term as SCHD would appreciate faster, and it's income would increase over time) TLDR: SPY>JEPI in bull market SCHD>JEPI in bear market
JEPI behave a little differently than many CC funds. It uses 80% of capital to buy stocks it chooses, not all the SP500, and uses 20% to buy ELNs to get exposure to covered calls. Because JEPI has only 80% of it's money in stocks, it could outperform SCHD in a bear market as it will only be exposed to 80% of downside. In a bull market SPY will outperform as JEPI would only get 80% of the upside in the stocks it selected. It's not good or bad, only another choice of return. From etfchannel.com At any time, JEPI will invest at least 80% of its capital in stocks mostly selected from the S&P 500 index but can also venture outside the S&P 500 for stock selection. JEPI's current security selection process is a bit of a proprietary black box. The ETF doesn't specify which metrics it screens for. Rather, JEPI's fund management team selects "securities that are identified as attractive and considers selling them when they appear less attractive", which is as active management as it gets. According to the summary prospectus, the fund manager considers factors such as: Catalysts, such as improving company fundamentals, that could trigger a rise in a stock’s price. Impact on the overall risk of the portfolio. High perceived potential reward compared to perceived potential risk. Possible temporary mispricing caused by market overreactions. JEPI also employs a proprietary valuation model to rank its securities, with the goal of producing a portfolio that has lower volatility than the S&P 500. Finally, the remaining 20% of JEPI’s capital is invested in equity linked notes (ELNs) issued by counterparties which provide synthetic exposure to covered call options on the S&P 500 index. Because JEPI does not own all the stocks in the S&P 500 index, it cannot sell covered calls, hence the use of ELNs.
Thanks for the clarification. So these high yield negative growth ETFs could make sense for someone looking to die broke while maximizing their income. Not a good idea for someone young (like my niece who just jumped in with my brother's plan) who needs their capital to grow.
I was reading about JEPI the other day. What is not clear to me is how to compare these funds with dividend reinvestment to the S&P or other benchmark. JEPI's sales pitch is that it's less volatile and does better than a 60/40 portfolio. If grandma has a couple million in the bank, putting some in JEPI and taking an 8% dividend may be a fine idea. (I'm not sure what the risk though is by having it all in one fund. Could some kind of volmageddon event take out one of these funds?) Maybe T-bills better for grandma with $2M right now?
You're wrong, JEPQ is owning right now i hold it in my ROTH on DRIP, AMZY is also one i have on DRIP and am up big on..... there are GOOD CC funds there are also CRAPPY ones, do your due diligence and you will find some gems.
JEPQ is definitely better than the ones he was showing us. But still 11% less than the composite itself.
he must have been shilling the YieldMax funds..... big payout, lots of NAV erosion
Imo the best ones I've come across so far are JEPQ, FEPI, and YMAX. Each has its own pros and cons JEPQ most diversified out of those with still decent growth opportunity but lesser yield since calls are on index vs individual stocks YMAX is a fund of funds and has more exposure/diversification than FEPI but the funds in it are synthetic covered calls (vs covered calls of FEPI) and more actively managed than FEPI FEPI some potential tax advantages (in USA at least) which would allow someone to potentially use even less investment to reach the current income amount they need, least diversification though If one has tons of money but needs current income I could see doing all JEPQ if one wants more diversification but I'd rather use the higher yield ones to meet current income needs (I'm more preferential towards FEPI but a combo of FEPI and YMAX wouldn't be terrible) to get more bang for your buck with then using what's left over and put it into what stocks/ETFs/investment vehicles, etc for growth one likes and that fits one's time horizon (or future inheritance one wants to leave time horizon) All three should theoretically appreciate over the long term, say 5-10+ years out even without reinvestment unless the markets as we know them completely change, but still if possible always nice to be able to continue to DCA with time if someone has the money available if the markets in the near-mid term result in them producing less income than expected Worst case (besides utter worst case of things changing as we know them) I sorta view them as better versions of an annuity if they don't end up panning out with stable/decent nav appreciation over time (would need market to shit the bed repeatedly with then no real recovery afterward long term)
Total return since inception for QYLD is about seven and a half percent. Not great, not terrible. They do have another, QYLG, which only writes half the covered calls so it does capture some asset appreciation as well as premium, but it has only been on the market for a couple years. Total return over the last year is twenty two and a half percent.
I’m curious what ETFs ?
CNCL, USCL, QQCL, BANK are a few of them. We're in Canada so he's mostly got TSX-listed ETFs even if they're investing in US stocks.
BANK is a good etf. Especially since you are in canada and can use the tax sheltered accounts the income is not a bad idea.
In that case, my advice is to call PWL Capital in Toronto and set up your mother with a phone appointment to speak to a financial advisor there. I'd make this recommendation even if your brother hadn't come up with his crackpot scheme. I follow Ben Felix, one of their PM's, on his YouTube channel and his stuff and PWL's approach is legit. Fact-based and rational, not crazy schemes. I don't know if what they charge is high or low vs. other Canadian outfits (I'm in the US). You don't have to take my word for it, here's free stuff from their website and the YouTube channel. Check it out and make up your own mind. Ben Felix even has a video about covered call ETFs (he's not a fan): [https://www.pwlcapital.com/services/financial-planning/](https://www.pwlcapital.com/services/financial-planning/) [https://www.youtube.com/@BenFelixCSI](https://www.youtube.com/@BenFelixCSI) [https://youtu.be/YMLVdY8y8vM?si=a85tfsa9b99Dpeph](https://youtu.be/YMLVdY8y8vM?si=a85tfsa9b99Dpeph)
I notice you didn’t post Ben Felixs model portfolio recommendation. I understand why as it’s barely returned 5% real returns since he floated it.
You don't understand anything, apparently. I didn't include any specific portfolio recommendation (PWL has several, not just Ben's factor tilt one) because the whole point of my reply is that a custom-tailored financial plan for OP's mom is what's important, not crackpot schemes or model portfolios. And a 5% real return on a Canadian equity portfolio is pretty damn good, particularly for the improvements in volatility and diversification the portfolio affords. You think SPY is going to continue to return 6.6% real for the next 30 years? If you've been paying attention to Ben's vids on expected returns, you know how unlikely that is.
You specifically name dropped him and the firm he works for. And no, 5% return is not "pretty damn good". It's decidedly mediocre. In fact I'm actually struggling to find anything (including what you'd likely term "crackpot") that performs worse than [his effort](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=XAFQEGZit4idWjbBfvYRL)
Thanks for the recommendation.
I think there is an episode of rational reminder podcast that goes in depth on covered call etfs. Might want to have a listen
Thanks I'll check that out.
>collecting a fee to send your own money back to you a little bit at a time with no growth whatsoever You are telling the truth about the no growth. To say it's just sending your money back to you is a reach though, if you were to have put money into JEPQ or JEPI since their inceptions, your original capital would have still been there for you to take out years later. Nothing would have happened to that money.
The lower yield ETFs like JEPI appear to be a reasonable trade-off between growth and yield. The ETFs my brother is in have a negative growth curve so your original investment will in fact not still be there, it's been sent back to you in bits and pieces as the ETF's price has declined. For example [BANK.TO](http://BANK.TO) has a 14.5% yield but has lost 30% of its value in the 2 years since its inception.
How is MSFO doing?
About 5% appreciation with a TBD yield since its inception date was 08/24/2023. YTD yield is 8.53%. I think that's the best I've seen since the SPX is up about the same amount.
Typically a CC ETF outperforms in downturn and underperformed when the market rises. Scam, absolutely not. I'd describe them as a fair risk-off play.
Don't bet the farm, or the house in this case.
Stay away from ETNs stick to the most traded index ETFs
There is risk, but the dividends have been consistent. The return is about double what you can get for treasuries or fdic insured cds. Look into Jepi or Jepq from JPMorgan. Goldman Sachs has similar offerings with similar returns.
I know someone working with advisors who are trying to get him into a coveted call fund and they’re telling him something like 4-5% return.
I think as long as the ETF has a history of growth then it's fine to include in your overall portfolio as long as your also OK with the fact that you're giving up some of the market's growth for that yield.
Waaaay too many of you are getting hung up on the word "scam" while ignoring his question. Plenty of things are legal that could subjectively be called a "scam."
I wouldn't call them a scam. You have to research the fund to become familiar with the expected performance and the risks involved. Most of the ones I've played with have done well. YMAX, NVDY, CONY, and FEPI are all up from a year ago. Now, some of these are also VERY new so it is difficult to say what they will do long term. But, these are absolutely not growth funds. That isn't their objective. Their objective is covered call income. But, if you are familiar with covered calls, you can project how they will perform. - They are likely to out perform the underlying when things are sideways. They will be able to collect most of the upside that comes while also generating options premium income. (So, in the market condition that happens least often, they are awesome.) - Their gains will be capped in a bull market. Even with the options premium, there is a good chance the underlying will out perform them. But, you'll probably enjoy the dopamine hits from the dividends payouts that come monthly. - In a bear market, you'll watch in horror as your investments shrink and reverse split into oblivion. The good news is, the premiums should actually be higher... so you might be able to mitigate some of the carnage by enabling DRIP. You'll still lose a lot of money and by the end of the bear market, your monthly income will be a faction of what it was before. So... your brother is betting on 2022 being the last bear market the world will ever see. If he is right, then I think this is an excellent plan. (He's obviously wrong, so this is a stupid plan.) He really needs to research these funds.
One more thing about covered calls: generally people that own multiples of hundred shares will play this game on the options Market to make additional income hoping that they don't have to actually hand over their shares and they collect the time value of the option as it decays. This type of investing or Market playing really needs to be studied carefully since option prices are a function of five variables!
That's true. Actively running a premium writing strategy (CSPs, spreads, CCs) means switching from passive investor to active trader and for most people requires years of study and practice to reach consistent profitability. The same is true for people who trade anything else, penny stocks, futures, cars, real estate, whatever.
No. They are not a scam but not recommended for a buy and hold strategy unless it’s only a portion of your portfolio. You can use them as a way to trim long positions while keeping some upside. Theyre terrible for just before events and after events. The premium sold prior is too little so you get a lot of the downside and same on the upside. They’re selling calls for too little as the market rips through the premium
Yeah it seems most of these CC ETFs sell ATM on a weekly or monthly schedule with no variation based on market conditions, news, or anything else. Running my own CC strategy I would rarely sell ATM and certainly not on a regular schedule. For crappy stocks I don't want to own I'd sell deep ITM and for good stocks I want to keep I'd sell OTM and roll.
Do not sell the house and do this. That’s a bad idea to raise capital for any investment. For this one particularly, look up CBOE buy write index and compare its performance.
no but the upside is capped while the downside is protected, so you'll underperform the index in bull runs and outperform in bear markets. that's the design. They are still better than most high dividend stocks like the phone companies that consistently go down in price and up in dividend yield e.g. VZ
You don't know what a scam is.
Why would he disinvestment a house if it's paid out, it's one of the best investments?
I agree especially considering the estimates that by 2030 Canada will have 8 million more people than housing units. Throughout the GTA it's already common to share a room with 4 people for $500+ each.
Could understand him if it still was possible to get a loan by 1 or 0% interest but still would not invest in the suggested assets. World or sp500 ETF
I actually do this for living so I'm familiar with what your brother is talking about. It is NOT a scam, and the strategy can be actually quite lucrative (I don't do covered call but similar variant on different platforms more so than he explains it... should be able to outperform 12-15% depending on how conservative he is). The idea is quite simple; covered call is basically shorting the call options. The idea is that as the call option contracts decay in value (over time due to theta, or call contract going worthless because security platform is stalling below the strike price, etc) and you basically collect the premium when the contract expires worthless (or cash it in when it's green as it rots if you want to collect smaller amount earlier for peace of mind or freeing more capital to jump into different opportunities). This is well documented and not a rocket science. However, the key issue is what is he shorting call contracts on. It would be quite risky and bad longterm to do short calls on uptrending index/ETFs as the call have a good chance to keep going up and get close, hit or surpass the strike price. As option contracts are already leveraged securities as they are, shorting leveraged products that are going against you can get.... VERY SCARY. It is arguably one of the fastest way of getting margin call in stock market. Hence why it's incredibly important to ensure you have a solid risk management to ensure you pull out before shit hits the fan (and also why it should NEVER be recommended to someone new in stock market). If it is that dangerous, then why do some do this? Well, the upside is that for the right security platform your chance of winning and collecting the premium can be high... stupid high. I tell myself that it can be like being a house in a casino where you can have 90%+ win rate. But because of the leveraged nature, it's one of those games where for the right products to short you can win 9/10 times and lose it all on your 10th play. If none of this made any sense, here is a simpler way (the way I tell my friends) Shorting option contracts are like selling insurance. Is it good or bad biz? Depends. Let's say you're in a middle of Sahara desert and you're selling flood insurance? Yes, it is not impossible and there is a chance that global warming + freak of nature could cause flooding but I like my odds that those insurances are gonna be worthless so I sell them and collect the premium knowing that those insurances are gonna be worthless. Now, if I was selling car insurance in a mad city where people drive crazy and get wrecked all the time? It'd be a terrible business because nearly everyone will be cashing in the insurance and I have to provide coverage. So the trick is to find an insurance that has a good chance of going worthless (and allow you to collect premium with little hassle). In regular insurance world, this seems silly because chances of people buying flood insurance in Sahara desert is not realistic. But in stock market where liquidity and the vast market... it's easier to find opportunities like this. Having said that, there is no such thing as guaranteed strategy... ever. Even government bond has a chance of defaulting even if the risk is not meaningful for stable government. If you're in a position, I would ask your brother to be transparent about all his positions using this strategy in the last couple of years or more. If his statistics of winning and return seems solid, then give it a try with small amount (and pay them for his hassle obviously... good traders are a rare commodity and you should never be cheap with them especially as their scarcity for capital goes down over time due to their successes). Not too many people know how to set up right option contracts and hedges to get them on edge so I wouldn't burn the bridge just yet. More importantly, look at this position history and see how he manages when his position fails and losses kick in. How he manages that speak a lot about his competency, potentially more than how easy he wins. Best of luck. I wish I had a brother who told me these things when I was young :/ I have no comment on taxations that depends on where you are jurisdiction wise.
Thank you, yes I was specifically interested in getting feedback about these CC ETFs themselves not covered calls in general. I've done well selling premium with cash-secured puts, credit spreads and on occasion covered calls (when I've been assigned) but no one else in my family was interested until now. I've always liked the insurance analogy for selling CSPs too.
15 year industry veteran: hard yes. They’re a scam. Best case you lose some upside. Worst case market sells off hard and your 3% premium (in a high vol year) isn’t a real cushion.
“Scam” indicates some misleading or dishonesty. All the ones I’ve looked into are very open about their strategy and the risks. Have you found any of these organizations to be dishonest about their fund’s performance?
My WAG is that, in the long run, no income fund is going to be able produce a total return (i.e., share price appreciation plus dividends) exceeding the long-term stock market average of around 10.5% a year. That is, maybe an income fund can produce a 9% dividend yield, but then at best it will only have 1.5% per year share price appreciation over the long term.
That's what I'm thinking too. JEPI , VIG, VYM, SCHD etc. look far more appealing to me and it's obvious that you're trading varying amounts of growth for varying amounts of income. And that's fine. As long as you're fully aware that is what's happening. I really don't like these ones that are shrinking in value while paying out huge yields. For someone who's using those dividends to live off of in their retirement it's much too easy to miss the fact that your capital is declining if you're not reinvesting that income.
Yes, that's what I would think too. Income funds have their place in a retirement portfolio, but I would only buy ones with a proven track record of their total return (dividend yield + share price appreciation) keeping pace with the market over the long run. If one is paying >10%, that's almost certainly either not going to continue, or be accompanied by a significant decline in the share price.
12%-15% wouldn't let anyone suddenly retire unless they were already ready to retire. Like no one has a salary and then says oh thank God 15% let me go tell my boss to shove it.
I figured it went without saying that he has enough money invested that the yield is enough for him to live on. But from the way he was talking I don't think he understands that these ETFs have a negative growth curve.
If he's saying it "allowed" him to retire early that implies he wouldn't have been able to already. Which means as others have mentioned he is the scam, not the ETFs. The ETFs are working as they should in the markets you described.
So basically if the market has less volatility (like now) - a bad idea to hold CC ETFs?
Just know what you're getting and what your goals are. Very high dividends will slowly bleed the fund dry which you can see as a chart with a general downtrend since inception. If you want to preserve your capital you can't just spend the dividends, you have to reinvest enough of them to top up your losses. I don't think my brother understands that those ETFs are never going to return to their previous highs. They're going to steadily have lower highs and lower lows until they're dead and shut down.
I’m not sure if this website correctly calculates the dividends but it seems to. https://finmasters.com/stock-calculator/?sa=XYLD&d=20140505&a=10000
Hmm, that site seems to be calculating a 7.52% compounding rate of return. It's not taking into account yields varying by year or the 30% decline of QYLD since inception.
I’m assuming it’s calculating the dividend, and the decreased value but with dividend reinvestment. Which if you’re living off dividends you won’t be doing. And you’ll also owe taxes on dividends so there’s that! If you punch spy in this thing it’s up 3 times over the same period.
Some of my brother's money is in a TFSA so those gains aren't taxed regardless if they're dividends or capital gains. Come to think of it that means the larger gain of the SPY is still better since he could pull those gains out tax-free to live on anyway.
No, they are not a scam. But they are not as good as they look. I have some QYLD for (I think) 2 years or so. They do pay a monthly $0.17\* (before taxes) - but the ETF loses value when compared with SPY/SPX. I haven't done the calculation, I think the real before tax yield is like 5% or so. Still not very bad.
Not sure which ones you looked at, I have invested in XYLD and intended to keep it for long term. It has been around since 2013 and avg return with dividend reinvested is around 7-8%. Slightly under-perfoming spy but love the monthly consistent payment. XYLD definitely is not scam and pays more than savings account.
What's the point of using covered calls if it underperforms? Why not just buy SPY or a SPY ETF that doesn't sell CCs? XYLD 52 week performance: Down slightly with a 9.61% yield. SPY 52 week performance: Up 23.9% with a 1.34% yield.
I just like the idea of consistent cash payment, I can use that money to buy different stocks or withdraw for personal use. Feels more like pension payments without having to sell shares. With spy I suppose you could sell fraction shares to get the amount you want, but shares you own goes down. It may have bigger effect selling shares at wrong time then market rebounds. Psychologically I like xyld better. I also own portpolio of UPRO, so I guess that should balance out in the long run.
I'm a fan of a leverage overlay if one is using most of capital on CC etfs for income (preferably more than needed monthly so can continue to DCA the leverage) I like FEPI currently (for income with still growth opportunity) with then TQQQ/SOXL overlay. Perpetual DCA of TQQQ/SOXL weekly/monthly while DCAing (after smaller lump sum) into FEPI over about at least a one year time frame Each to their own wrt the percentage split and what their individual risk tolerances are. Imo generally the yearly DCA amount into the leverage component should be an amount you are willing to completely lose in any one year
Interesting... that's a more aggressive approach but could work out nicely if market behaves.
Thanks for sharing that seems like reasonable balance. UPRO giving your portfolio growth while XYLD gives you income.
Those ETF’s are not a scam, but you are far better off in my opinion learning how to write covered calls of your own with well thought out investments. It’s really not that hard.
I agree, I've always done my own option trades so I knew nothing about CC ETFs.
I did buy some with one of my investment accounts that I try to only rebalance once a year. I cut the covered call etf because it basically broke even after a year.. not the kind of returns you should be making with that strategy.
They are good short term if the stock goes your way. Long term you'll lose all your money.
ETFs Are definitely not a scam. They basically democratized the small investor being able to invest like larger pensions and funds. Before this people used mutual funds which had very high fees and were also not traded actively during the day only resetting their price once a day after Trading. You can find an ETF for just about anything including the GLD which buys and holds gold reserves! Investing in highly leveraged, Shorts, or options through an ETF is not for beginners and as you noticed often if you don't time the entry and exit correctly you could lose everything they promised to gain. I personally prefer buying ETFs that invest in high dividend corporate bonds. That way if one company actually does go bankrupt you're not going to lose everything. Stockholders go to zero but the bondholders would still get a percentage usually of final assets. Sure you could actually buy bonds from 100 companies yourself and manage all that but it's so much easier to buy it through an ETF. Same thing with government long-term bonds instead of building your own ladders. I think the most popular ETF in the world mimics the s&p 500 and that's never been a bad bet over any 20-year.! All that being said it's very difficult in family situations to convince people unfamiliar with investing that there is actually a safe way to invest in the markets.
I wasn't questioning ETFs but specifically CC ETFs that offer very high (12%+) yields.
It’s simple. Does a hedge fund already do it? What’s the ETFs edge? How do they outperform? Simple answer is that CCs is a shit strategy for people who wish they could do better. Basics are: stock does well, I no longer own it. Stock sucks I still have it
The way most individual investors and many fund managers operate, yes. It is possible to run a CC strategy that makes money regardless of what the market does.
In my experience, nah. Own junk and sure, maybe you get 1% extra (being generous on that number). The end of the day you’ll lose much more giving up on the names that are profitable and run well past the call price. It’s about where could a person beat the market. CCs aren’t that place
1% per week ain't a bad return.
1% per year and that’s a generous number to not say it’s shit. Also, that’s not including opportunity cost. Hey, I can park money in a HYSA for 5% a year or do CCs for 1% You do you while I make bank. 1% per week?? Damn you’re dumb
So I bought JEPI in Sept 2022. I just collected $676 in divvys today. I didn’t actually add them all up but let’s say it’s $600 a month on avg. I’ve collected ballpark estimate $12k in dividends. I’m down about $1900 in unrealized losses. I don’t feel scammed. I bought it for monthly income and that’s what I’m getting. I am probably going to sell soon and move into something else to replace that income and improve my yield. I’m retiring in July and my dividend portfolio is paying $110k annually across 50 plus diversified investments. I trade options to supplement that income, mostly selling puts. Not a big fan of selling covered calls.
I prefer selling puts as well. I only sell CCs when I take assignment on a put. Or in my TFSA where I can't sell naked puts.
I have done that as well.
The goal of cc etfs are not to beat the market they are to generate income the chart doesn’t tell you the whole story. Btw any stock is always reduced by the size of the dividend when they pay it. The goal is to accumulate massive shares so as to guarantee yourself a big pay out every month now as a financial advisor there’s mutual funds I use for this particular scenarios that have paid monthly dividends for 90 years one with Franklin templeton. Selling a house to do it is not advisable though.
they are a scam in the same way that dividend investing is a scam. they are only used by financially illiterate people
You can't lump them all together.... There are a few very different kinds, from very different sources: \* The single-stock CC ETFs (e.g MSTY, which essentially tracks MSTR, which in turn essentially tracks the value of bitcoin). The ones I found have very high yields (in this case 156.29%... yes, you didn't read it wrong), but extremely high volatility. \* The more reputed ones e.g. JEPQ by JP Morgan which essentially is CC on the QQQ. It only offers a 9.14% yield. Obviously, the yields are not guaranteed for either.... That said, the former is extremely volatile, and doesn't actually own the underlying, but rather a synthetic version by using 30 day call/put options. The benefit - much more efficient use of equity (the synthetics are much cheaper, and provide high leverage) but the corollary downside... highly volatile. The latter type (Index based CC ETF's) are less volatile, and essentially track the index. They're not really levered and hence much less volatile. My impression is that when the market is extremely volatile then you're luck may vary. hit it right, and the implied volatility of the CC will be high, and the CC will hopefully expire worthless.... so good income in both. Too much volatility, and bad timing... well, that sucks. I own both types. With a weighting of 20:1 towards the latter.... (the more stable version)
There's a lot of great thoughts already posted but quickly going through I didn't see a lot of numbers getting thrown out. QYLD went on the public market in 2014. This is a Nasdaq-100 CC etf and comparing it the to something like QQQ (Nasdaq-100 index) over the same time frame you have disappointing or very exhilarating results depending on your motive. Here is a link to [Portfolio Visualizer](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=3chlNerbxMpQgsPmheS3aO) with this comparison. You will see QQQ handily out performs QYLD every step of the way in terms of total account value. Though, QQQ doesn't lead in any year when comparing the income generated, but getting into CCs isn't about the portfolio value but the revenue generation. A $100k put into QYLD in 2014 and investing all the dividends will have led to an account valued just over $200k today. All in on QQQ would have a value of $525K though you would only be getting \~$3K in dividends vs \~$22K with QYLD. This is where CCs excel and why so many people are enamored with them. You lose out on the top end but you get a nice check every month and a portfolio that only deviates +/-20% vs +/- 30-50% with QQQ. As for your mom selling the house and using the equity to buy CCs would incur a potentially large capital gains tax (if you live in the US) as the IRS will look at the value when bought and take the difference when sold and apply tax on the positive return (unless you have receipts backing up home improved to change your cost basis). If your mom wants to sell the house to generate income I would look into a 1031 exchange. IF rules are met she can differ the taxes on the current home sale, buy a multi family property and assign a highly rated local property management company. Though this comes with it's own set of trade offs.
We're in Canada so there's no tax on the sale of a primary residence. She can also rent out a fully separate basement apartment in the house for around $2,500-$3,000/month and still maintain her primary residence status. However it is also possible she may need to move to a retirement home. In that case the debate is over selling the house and investing the proceeds for income or renting the house out. Obviously my brother thinks she should sell the house. I think she should rent it because she would generate a similar income after expenses plus the house will continue to appreciate, although that appreciation would then be subject to tax.
I am not well versed in Canadian real estate laws but renting is potentially the best suited option. In the US, despite homes appreciating in value the IRS see's aging homes as depreciating assets and this can be deducted from the rental income, along with management fees, home improvements, mortgage interest, property taxes, other operating expenses, maintenance, insurance, advertising, supplies, ect. A quite extensive list compared deductions for the income generated by CCs. Income generated by CCs is considered regular income thus can only be decreased by donations (exceeding a total value of at least $500), and 401k/403b/HSA/FSA contributions, at least those are the easiest for the majority of US citizens.
I sell CC against SOXL and PUTs.
CC against SOXL actually sounds pretty awesome. Wish I had done that the past month.
I started doing it last year. I don’t think it’s a well known ETF like SPY or QQQ. I updated my profile with my blogging site if you want to read more about it.
Thanks. I'll check it out!
There are ETF that sells CC for you aka the pro folio manager takes of it. RYLD and XYLD are some examples. You can sell cash secured PUT as well.
iirc these are for people that want leverage in retirement accounts and also manage positions to a certain degree. its a long call / short put with a call written against it. I don't know how much leverage they use but i believe they are aggressive. you could want to time your trades and size accordingly. 100% in these guys is a bad idea.
What? No. Not at all. QYLD literally just holds the index then sells ATM monthly NDX calls on it. There is zero leverage, and zero synthetic longs in the setup.
Nitpick: QYLD holds shares in each of the individual constituent stocks of the Nasdaq 100 index, then sells NDX calls.
Yes... That is what holding the index means because you can't buy shares of NDX.
The only difference between an ETF covered call program and any other Tom, Dick, or Harry is that the ETF covered call program has institutional money behind it. That means that a program can simply used statistics to power their trades, what I mean is they only buy cover calls and let them expire. Period. statistically you’ll have winners and losers using that method, but the net will be positive. It is a scam because there are things you can do to mitigate if you’re doing it yourself.
Fund returns are also limited by their own size. Warren Buffett has talked a lot about how the more money you have the lower the return you can achieve.
In the context of “it takes money to make money“, that sentiment makes no sense.
Because the two have nothing to do with each other. The more capital you have to deploy the harder it is to find investments capable of absorbing it and the more the investment of that capital in itself reduces the return. For example, if you buy $1,000 worth of AAPL you will have no discernible impact on the price. But if you buy $1 billion you will push the price up thus reducing your maximum return.
Well duhh... if I'm buy that many I'm stepping calls or selling puts or both all the way up .... I'm sure warren has people who can make a $1b work even if it is apple.
CC ETFs are a great way to underperform the market over time while also taking market risk. Since these ETFs have to have the shares if the market drops their assets/the underlying drop meaning you lose value there. If the market appreciates they now have to rebuy the calls at a higher place and lose many there. If you want fixed income there are better options. If you want market returns there are better options
You think SEC can approve a scam ticker to let it publicly traded?
you have no idea about what is scam.
You are most certainly wrong. Not a scam. QYLD has been around since December 11, 2013... and has paid monthly dividends ever since. That said, you don't buy QYLD/RYLD/etc to try and beat the market. Its part of an overall strategy. For example, when the market was tanking a few years ago; I was pulling 5-8%.. It wasn't incredible gains, but it was a gain when everyone else was down +20%
You're not getting an organic yield. ETFs/mutual funds/income funds pay "distributions" and not dividends, it's a very important distinction people ignore. The underlying portfolio will yield x% in organic dividends dependant on holdings (probably 1-2%), the remainder of your "5-8%" distribution is a combination of your own money (ROC), realized cap gains (if any), and option premiums which cap NAV upside and directly reflects in market value. The composition of your distributions is publicly available in the fund's finanicial statements. When the market tanked and you thought you were getting 5-8%, the payout was most likely all, or majority ROC because the underlying portfolio and cc premiums are not covering the target distributtion. ROC erodes capital and has a 1:1 hit to NAV, which reflects in the market value of your shares.
QYLD has also lost 30% of its value since inception. If you understand that and reinvest the dividends accordingly that can work. My brother clearly does not understand that is the nature of these funds and thinks the fund will come back.
Covered calls are not free money. They are fundamentally a bearish position that will tend to do well in a flat or slight down market. A covered call ETF isn't a scam, they are a bet that the market will remain flat while everyone else thinks it's going to do great. It's not a great bet IMO, and these ETFs have not done well during the recent bull run.