Covered call ETFs like JEPI, JEPQ, ULTY, and XYLD have done well in the past few years, attracting billions of dollars in assets as investors embraced their high dividends.
JEPI, the biggest covered call ETF, has attracted over $41 billion in assets, thanks to its 8.3% dividend yield, which is much higher than the S&P 500’s 1.25%.
Similarly, the JEPQ ETF has gained over $31 billion in assets because of its 10.40% yield. The YieldMax Ultra Option Income Strategy (ULTY) has over $3.3 billion in assets and a yield of 108%. Also, the Global X S&P 500 Covered Call ETF (XYLD) has $3 billion and a dividend yield of 12.9%.
How these covered call ETFs work
JEPI, JEPQ, ULTY, XYLD, and other covered call ETFs have become popular funds among investors because of their high dividend yields.
These funds, which are commonly known as boomer candy, can generate higher monthly returns because of how they are constructed.
They are actively managed funds that generate a return by using a financial engineering process. The first stage in this is where they accumulate stocks in an index, with the JEPQ ETF buying those in the Nasdaq 100 Index.
JEPI ETF first invests in 131 companies in the S&P 500 Index. After doing that, the fund managers then sell call options on the underlying index. A call option is a contract that gives the buyer the right but not the obligation to buy an asset at a specific price within a certain time.
The call option trade gives it a premium, which usually widens during periods of high volatility. The ETF then distributes the premium and the dividends to its shareholders.
Are covered call ETFs good investment?
Covered call ETFs have become popular among investors because of their high dividends, which are usually more than traditional funds and what government bonds pay.
Most importantly, income investors love them because they pay their dividends every month, making them ideal for retirements.
However, the best way to assess an ETF’s performance is not how much money it pays in dividends. One should consider the total return, which includes the stock price performance and the dividends.
A good example of this is to compare JEPI and XYLD with that of the S&P 500 Index. The benchmark S&P 500 Index has jumped by 14% this year, while JEPI and XYLD have dropped by 1.15% and 5.92%, respectively this year.
The S&P 500’s total return this year is 15%, while the two have returned 5.27% and 1.90%. As such, while the S&P 500 Index investor is receiving less money in dividends, he is benefiting from the price return.
The same is happening with the Nasdaq 100 Index and the JEPQ. JEPQ’s total return this year is 10%, while the Nasdaq 100 Index has returned 18.70%.
Meanwhile, the Coinbase stock has had a total return of 14.5% this year, while the CONY ETF, which has a dividend yield of 142%, has returned just 14%.
Therefore, these covered call ETFs are not good investments as they only benefit the sponsors who charge a higher fee and generate a smaller total return. For example, the CONY ETF has an expense ratio of 1.22%, while XYLD has a ratio of 0.60%. JEPI and JEPQ have a multiple of 0.35%, which are all higher than the VOO and IVV’s 0.03%.
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