Covered Call ETF's

Adyinvestment

I would be interested in the forum's view of covered call ETF's, a colleague of mine uses them exclusively and has nothing but positive sentiment regarding them.

In my research I have concluded they seem to be aiming purely for a high dividend yield with minimal growth, as such they outperform in bear markets and underperform in bull markets, there are a number of big ones in the double-digit yield.

Are they considered by the forum any more or less risky than a similar holding ETF?

The below Investopedia article leads me to think there is nothing particularly extra risky with them, although I am wondering whether it comes down to the individual ETF management and skill?

Benefits of a Covered Call ETF (investopedia.com)

Am I missing anything?

masonic

Are there MiFID II compliant ETFs you could invest in through a UK platform or broker? I wasn't aware of anything listed on LSE, but I probably wouldn't recognise one if I saw one. Relatively high charges would be one possible drawback of such an ETF. That, and underperformance the majority of the time when markets are rising.

Adyinvestment

masonic said:

Are there MiFID II compliant ETFs

Um.....?



They do all seem to be US based, also it looks like they are all a new concept, in that I can't find any history before 2020.

2 of the ones I have been told about that are on my platform (IG) are QYLD & RYLD, these are offering approx 11%-13% yields. Charges seem to be about 0.6%

masonic

Adyinvestment said:

masonic said:

Are there MiFID II compliant ETFs

Um.....?
They do all seem to be US based, also it looks like they are all a new concept, in that I can't find any history before 2020.
2 of the ones I have been told about that are on my platform (IG) are QYLD & RYLD, these are offering approx 11%-13% yields. Charges seem to be about 0.6%

MiFID II is a set of regulatory rules stating that UK investment platforms must provide retail clients with a cost disclosure document for any financial instruments they offer. Many US listed ETFs do not provide such information and are not available to UK retail investors via mainstream platforms as a result. If IG are offering these ETFs, then it sounds like this is a non-issue for you, they've either cobbled together something satisfactory, or they are non-compliant.

The cost is relatively high, but it's no surprise, as there must be active management of the options behind the scenes. This could be a US phenomenon, as the US operates under a bizarre system of taxation for actively managed funds.

The question I'd have is when would it be suitable to hold such a fund? It seems the fund will be expected to underperform the index over the long term, and only partially reduce losses during downturns. So hold passively and take a long term hit, or try to time the market and get a halfway house between staying invested and moving to cash. Perhaps I'm missing something.

Adyinvestment

My colleagues plan is to FIRE on these in a few years time, I suppose if they are what they say they are this could be a viable option.

I am in the growth phase of my investing so this is not my plan, I am however starting to cobble together an income portfolio as a portion of my overall portfolio (I have what most would call an eccentric investment strategy) and they interested me.

I have no experience with covered calls so was trying to work out if that made them more or less risky than say the same shares in a normal ETF.

masonic

It's going to make the ETF lower risk than the index, barring some catastrophic implementation of the strategy. It would have been a better investment than an equities:bonds asset mix in the year to date (but the interest rate shock that's impacted bonds is a one-off... unless interest rates go back down to historic lows again at some point). So I can see why someone nearing the end of their accumulation phase might be attracted to such a fund. The two ETFs you mentioned are both tracking US markets, and I don't know if other geographic regions have equivalents, perhaps not. It could be argued that given the US market is so overvalued (or at least was...), that a global portfolio incorporating one of these for US exposure would have some downside protection against valuation mean reversion.

For a typical long term investor, the expectation would be for this fund to underperform, so perhaps the use case is for those wishing to de-risk ahead of drawing down on their investments (in which case perhaps the NASDAQ is worth a miss entirely )