Covered Call ETFs

Observant1

JP Morgan Equity Premium Income ETF (JEPI) has become the largest active ETF ($29.1B AUM) since its launch in May 2020.
The fund had inflows of approximately $12.3B thus far in 2023.
Now other firms want a piece of the action.
Morgan Stanley launched Parametric Equity Premium Income ETF (PAPI).
Blackrock introduced BlackRock Advantage Large Cap Income ETF (BALI).
Golman Sachs launched the Goldman Sachs S&P 500 Core Premium Income ETF (GPIX) and
the Goldman Sachs Nasdaq-100 Core Premium Income ETF (GPIQ).
Covered call ETFs may appeal to investors seeking income creation with some downside protection.
These ETFs reside in Morningstar's Derivative Income category which had inflows of $20.4B this year.

Citiwire article (may be paywalled)
Link

Morningstar also published a related article recently.
Link

yogibearbull

Covered-calls don't offer downside protection (beyond the small premium received). If they buy puts for downside protection, that would cut into call-writing premium, i.e. the fund income. Only those ETFs that are offered for hedges may use calls and puts for setting up collars, buffers, etc.

Another factor is taxes. Basically, the CGs over time get converted into call premium and that income is taxable at the highest marginal rate. So, it may be better to hold covered-call ETFs in tax-deferred/free accounts.

Observant1

"Covered-calls don't offer downside protection (beyond the small premium received)."

@yogibearbull,

Can you elaborate?
One facet of the JEPIX approach "seeks to deliver a significant portion of the returns associated
with the S&P 500 Index with less volatility, in addition to monthly income."
The fund's 3-year beta was 0.63 as of 09/30/2023.
Since launch, the worst year for JEPIX was a -6.98% loss while the max drawdown was -18.33%.
The corresponding stats for VFIAX during this period were -18.15% and -23.89% respectively.

Portolio Visualizer

yogibearbull

Lower volatility or downside of JEPI comes from other things (not call writing) - in the SP500 universe, it finds undervalued stocks with lower volatility. M* shows %equity at 85%; rest 15% is used to support equity-linked notes (ELNs), securities lending, etc. On the whole, its effective-equity is 68%.

msf

Echoing what yogi wrote, according to M*'s analysis, JEPIX even without the options overlay holds a defensive portfolio with a beta only 0.8 of the market. For example, unlike VFIAX, it doesn't hold AAPL, NVDA, or TSLA. In broader terms, it holds about half as much technology as the index and about 50% more energy stocks than the index.

The other covered call funds mentioned could have different equity strategies and behave differently.

Observant1

Yogi,

Thanks for your response.
I now understand the context for this statement.
You're referring to the call writing process itself while I compared the fund's performance
to its S&P 500 benchmark.

WABAC

If you're shopping, you might kick the tires on DIVO.

yogibearbull

@Observant1, M* has ANOTHRER piece on "Covered Call Funds" by the SAME author.
https://www.morningstar.com/markets/why-are-covered-call-fund-yields-so-high

Observant1

Thanks, Yogi!
I'll check it out.