With tantalizing yields that can reach 10% or more, covered-call exchange-traded funds have become a popular investment. The products essentially invest in stocks and then sell call options on all or a portion of the portfolio. The result is income for investors, based on the option's premium, in return for capped upside if the option is exercised.
"That payout is not for free," said Morningstar manager research analyst Lan Anh Tran. "The payout was coming at the cost of your upside." That can be particularly costly during a market rally.
The funds should outperform when the market is flat or down, and investors collect the premium and the stocks don't get called away. That's what happened in 2022, when the S & P 500 lost nearly 13%, Tran said. "Obviously, in a market like 2023, or like the first half of 2024, when the .
.. broader stock market has just been going up, these are going to lag the market," she said.
The S & P 500 has gained 18% so far this year, while the Nasdaq Composite has rallied 23%. Still, the ETFs remain popular. The derivative income Morningstar category, dominated by covered-call ETFs, saw inflows of $24.
3 billion over the past year, as of June. Total assets under management now stand at $90.6 billion.
The largest actively-managed, covered-call ETF is the JPMorgan Equity Premium Income ETF , which has a 6.88% 30-day yield and an adjusted expense ratio of 0.35%.
It is up 6.64% year to date. JEPI has seen nearly $4.
9 billion in inflows over the past year, .