The number and popularity of these funds have exploded. From assets of around $7 billion a couple of years ago, covered-call ETFs now hold over $70 billion of investor money.
Once you look at some of these funds, the appeal is obvious. The funds pay between very attractive (think 12% to 15%) and massive (over 100%!) yields.
Of course, the massive yields raise the “Is this too good to be true?” question. Answering that is what ETF Income Edge is all about…
This group of funds uses a wide range of options strategies with a host of underlying assets. If you have studied or done any options trading, you know there are hundreds of ways to combine options contracts to achieve targeted investment outcomes.
Covered-call options trading involves owning an underlying asset and selling calls against that asset. While the concept of covered-call writing is simple, there is a myriad of ways to employ the strategy.
Fund companies have the advantage of being able to employ securities and options strategies that are not available to individual investors.
While the opportunity to invest in these high-yield funds is exciting, there are a number of factors an investor should consider before buying shares.
- The strategies employed by these funds can be complicated. The strategies are laid out in the fund prospectuses, and it takes some digging, reading, and a deep knowledge of how options work to understand how a fund should perform.
- Many of the funds have very short track records. Often less than a year or only a few months. Only time will prove out which of the covered call ETFs are managed to provide superior returns.
- The range of fund types in the group can be overwhelming. The 80 or so funds in my database are divided into 18 categories. The categories cover the types of underlying assets and the option strategies the funds have chosen to employ.
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