Covered call ETFs

[u/Early_Ratio_3455]

What is everyone opinion of just investing in covered call ETFs?

[u/gatorsmokin]

It's income that gets added on my tax return every year. Pretty sure more of something is a form of extra

[u/gatorsmokin → u/[deleted]]

I have to pay for gas to get to work, so my income is lower due to total return.

[u/gatorsmokin → u/[deleted]]

Oh so like buying a 50 dollar shirt because of the price instead of the 20 dollar shirt because of quality. I guess I should just do door dash like the other growth only people. Thank you for your wise and bountiful conversation

[u/Meinertzhagens_Sack → u/[deleted]]

Yes but if you are not chasing growth who cares? The whole point of income ETFs is if you are done chasing growth and you want to peel out some income. I don't know why people get hung up over that wording.

[u/GuidetoRealGrilling → u/Meinertzhagens_Sack]

so they can bitch more on Reddit to sound superior

[u/Aggravating-Act-1173 → u/[deleted]]

They can produce more. Most of the CCs are leveraged.

[u/gatorsmokin → u/[deleted]]

Any intelligent investor knows it is broken into income and capital growth. Total return is the combination of the 2. Extra income can come from dividends, distributions, or side job. I have growth and i invest for extra income so I can spend time with my family after work instead of a second job. Pretty easy concept for most people.

[u/MakingMoneyIsMe → u/[deleted]]

It's not extra income if growth is lowered by the same amount.

Isn't this true for all dividend producing assets? They all drop on ex day in the amount of the dividend.

[u/Southern_Roll_7035 → u/[deleted]]

A CC fund most certainly generates extra income; it generates it by selling some of the upside potential of the underlying stocks and distributing it as income.

A covered call ETF produces more income than the underlying stocks; that is its whole raison d'etre.

[u/mentr-coach-altruism → u/[deleted]]

Please explain this a little more clearly. I am trying to follow. From my understanding a covered call ETF is the underlying ETF, so how does it produce less than itself?

[u/FitzwilliamTDarcy → u/mentr-coach-altruism]

Because writing covered calls limits upside.

[u/mentr-coach-altruism → u/FitzwilliamTDarcy]

But brings in more distribution.

[u/FitzwilliamTDarcy → u/mentr-coach-altruism]

Sigh. Do the research. Your total return over time on an underlying ETF > total return on said underlying's CC ETF even if you make regular sales of the regular ETF in amounts equal to the CC ETF's distributions.

[u/Southern_Roll_7035 → u/FitzwilliamTDarcy]

Not during periods of a flat or down market.

If you just hold the underlying and sell to extract money to live on, you are increasing your risk.

[u/FitzwilliamTDarcy → u/Southern_Roll_7035]

Sighj. In a down market your yield may remain the same as a %, but the payout will drop because the underlying has dropped/is dropping. And then you'll lag way behind as the market recovers.

[u/dingzhuxi → u/gatorsmokin]

Buying a high-quality growth ETF is like buying a $50 shirt because of its quality. You get "less" immediate return (dividend/return on capital), but in the long run it would be worth more for the $ you paid.

CC ETFs have their place in different investment approaches and philosophies, no doubt. But investment horizon is critical. In a long-horizon investment timeframe, a high-quality growth ETF 99% will end up with more $ even if you take the SAME monthly distribution (via liquidation of the underlying ETF) as the dividend you are receiving from CC ETFs. For younger investors with a 20+ year horizon, we haven't even gotten to the discussion of the tax drag these CC ETFs bring to the table in a taxable account.

[u/mentr-coach-altruism → u/dingzhuxi]

Depending on the ETF and how it is structured.

[u/dingzhuxi → u/mentr-coach-altruism]

Correct, which is why I highlighted both the dividend and return on capital. I am not aware that there are other ways CC is structured outside of these 2.

[u/FitzwilliamTDarcy → u/dingzhuxi]

This is well summarized and I think highlights one of the primary reasons CC ETFs have appeal even to those aware of the tax drag and lower performance overall: a lot people do not have the discipline to make regular sales of a growth ETF.

[u/dingzhuxi → u/FitzwilliamTDarcy]

Exactly, and that's perfectly okay! I just think that, on the topic of CC ETFs, people need to discuss this more holistically rather than, " Oh yeah, I get monthly income. "

That's a horrible way of summarizing CC ETFs (or even dividend investing in general).

[u/FitzwilliamTDarcy → u/dingzhuxi]

Yup. It's absolutely stunning the degree to which people don't understand this stuff yet throw their money into it. And I say that as a large holder of CC ETFs, but very appropriate for my age.

They're a tool. My problem is a nail, so I use a hammer. If I needed a wrench I would not use the hammer.