Well, that’s a very good question imaginary reader and of course my answer is not investment advice because I have an independent, thinking brain that doesn’t like doing what the system tells it to do. All I’m doing in this post is sharing what I have learned along my investment journey. Depending on your individual circumstances, I may be right or wrong. You have to decide for yourself big boy.
What is a covered call option ETF?
Covered call option ETFs are exchange traded funds using an underlying index or portfolio of securities to generate income from covered calls. The ETF will usually own the company or entire index and sell options on them to generate a premium which is then distributed to investors on a monthly or quarterly basis.
Should I invest in covered call options?
That really depends on you and your personal circumstances. If you’re in your twenties and you have no plans to retire in the next ten or twenty years then I would generally say to avoid covered call ETFs. Invest in the underlying index instead and capture all of the growth. You’ll miss out on the big fat juicy monthly dividend but your total return will always be greater than if you had invested in covered call options.
If you’re older or you plan to retire as quickly as possible, then covered call option ETFs are definitely something to consider. Rather than the paltry 1%-ish dividend per year paid out by an S&P500 index ETF you can potentially receive a 10%-ish dividend per year from a covered call option ETF using the S&P500 index which is usually paid out monthly. It’s not all rainbows and unicorns though as you’ll also underperform the underlying assets or index that is being used.
It’s two different games really. Regular S&P500 (no options) is about accumulating as much as you can for the long term. Covered call options S&P500 are about using those assets now to pay your bills.
A strategy put forward by those who can only see in total returns terms is to sell 4% of your regular S&P500 ETF each year in retirement but I don’t like selling stocks. I want to be buying more stocks every year, just in case I live to be 250 years old!
What’s good about covered call option ETFs?
The high income is the main reason one would want to invest in covered call option ETFs. If you’re retired and living off of dividends then a monthly paying ETF with a yield of ten percent is pretty useful.
Even if you’re younger and just want to increase your passive income by a few hundred dollars each month then they’re still a viable option. Just remember to reinvest a percentage of those dividends each month to increase your future income and the growth of the ETF.
What’s bad about them?
Well, they look like the perfect investment: a high growth index like the Nasdaq 100 combined with a 10 percent dividend income. But unfortunately you can’t have your cake and eat it too.
You will miss out on some of the upside growth. So the underlying index that the option ETF uses will always outperform over the long term. I’m yet to see the total return of a covered call options ETF beat the equivalent plain vanilla ETF that doesn’t use options.
Taxes can also be a drain as you’re producing more income and paying tax on it rather than leaving it in the ETF to compound.
Compound annual growth rates of your dividend income and the value of the ETF can struggle over time. My long term plan with covered call ETFs is to reinvest a small portion of the dividends to create my own growth.
Do I invest in covered call ETFs?
Yes, I currently own JPEQ on the Australian stock exchange, along with FEPI and QQQI listed in the United States. I’ve only just started buying them in the past few months and currently have about $3,500 invested in them. I do plan to buy more in the very near future though as I want to increase the income of my ETF portfolio to at least $100 every month.
I started out researching options and had planned to start using them myself, but then the more I looked into options based ETFs I thought, why should I bother trading options myself when I can just buy an ETF?
That way my portfolio stays passive as I’m not actively trading and I still get my monthly income. Voila!
My first goal with covered call option ETFs is the $100 per month as I mentioned above and then I’ll reevaluate the situation. I’ve decided to make the ETF portfolio lean towards dividends more than growth as my individual stock portfolio already has a lot of growth companies.
Conclusion on high income covered call ETFs!
If I planned to retire twenty years from now I wouldn’t bother with a covered call option ETF using the Nasdaq100 to generate an income I would simply invest in a plain vanilla Nasdaq ETF.
Same goes if I was in retirement or close to retirement and could produce enough income to live on the plain vanilla Nasdaq ETF.
I would only consider covered call option ETFs if I had to increase my dividend income to pay my bills. I would also reinvest a portion of that income to increase those dividends over time.
Like most investment vehicles they have their pluses and minuses. As part of a diversified retirement portfolio I really like covered call option ETFs. They make up a very small part of my portfolio now but I plan to increase that over time. I have been in growth mode for a while but I’m now looking to slowly transition into a growth/income mode and covered call option ETFs will be a part of that strategy going forward.
Do you own covered call option ETFs and how have they performed?
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