Another Reader’s Question

When the bear market arrives you can expect the “balloon” to pop.

“I was wondering if you looked into the newer ETFs, since you focus is Easy Income. These are ETFs that use covered calls to return a high yield to investors. One example from JPMorgan is JEPI, I think it yields 8%. Any thoughts?” – Dino

Yes, Dino, I do have thoughts and have written about this in a couple of posts. ETFs like JEPI, QYLD and XYLD have some unique risks. (Disclaimer: I owned 200 shares of JEPI in 2023; I owned shares of XYLD from 2021 through early 2023 and broke even after dividends; I owned 1,200 shares of QYLD from 2021 through 2023 and suffered a net loss of $3,649 even after dividends.)

Previous Blog Posts

If you go to my blog and click on the magnifying glass and enter “JEPI” you will find three posts that mention this ETF. “XYLD” is mentioned in five posts, and “QYLD” appears even more. Be careful. Just because I liked an investment in the past doesn’t mean I still do.

Cautions are in Order

I trade covered call options. Anyone who has been serious about this type of trading understands that it is a wonderful way to make additional income. However, during bear markets the well dries up. When the market is going down, I generally reduce my covered call options trades. One Seeking Alpha author points out the risks: “During a long-term bear market, XYLD’s price and dividend are likely to permanently decline, since drawdowns are incurred while bear market rallies are not.” – Seeking Alpha author Harrison Schwartz

“In general, covered call strategy funds are a newer concept and were not popular during the last large bear markets, such as 2000 and 2008. With this in mind, many investors may not understand the risk exposure in covered call strategies. Over the long-run, covered call strategies are expected to deliver similar total returns to the underlying index – in XYLD’s case, the S&P 500. However, it is virtually guaranteed that, in the long run, a covered call strategy will cause capital decay.” – Seeking Alpha author Harrison Schwartz

Yield is Attractive

There is no doubt that this type of ETF has attractive yields. Just know that the next bear market can significantly hurt total returns. Right now Seeking Alpha’s QUANT ratings for QYLD and XYLD are bullish. That can change very quickly.

For that reason, I would caution investors to be a bit skeptical of the yield and only buy small amounts of any of these funds. The party will end.

XYLD  Fund Profile

Global X Funds – Global X S&P 500 Covered Call ETF is an exchange traded fund launched and managed by Global X Management Company LLC. The fund invests in public equity markets of the United States. It invests directly and through derivatives in stocks of companies operating across diversified sectors. It employs long/short strategy and uses derivatives such as options to create its portfolio. It invests in growth and value stocks of large-cap companies. It seeks to track the performance of the CBOE S&P 500 BuyWrite Index, by using full replication technique. Global X Funds – Global X S&P 500 Covered Call ETF was formed on June 21, 2013 and is domiciled in the United States.

The investment seeks investment results that, before fees and expenses, generally correspond to the performance of the CBOE S&P 500 BuyWrite Index. The fund invests at least 80% of its total assets in the securities of the underlying index. The underlying index measures the performance of a hypothetical portfolio that employs a covered call strategy. A covered call strategy is generally considered to be an investment strategy in which an investor buys a security and sells (or “writes”) a call option on that security in an attempt to generate more income. Benchmark: CBOE S&P 500 BuyWrite TR USD

JEPI Fund Profile

J.P. Morgan Exchange-Traded Fund Trust – JPMorgan Equity Premium Income ETF is an exchange traded fund launched and managed by J.P. Morgan Asset Management, Inc. The fund invests in public equity markets. The fund invests directly and through derivatives in stocks of companies operating across diversified sectors. It uses derivatives such as options to create its portfolio. It invests in growth and value stocks of companies across diversified market capitalization. It invests in stocks of companies that are deemed socially conscious in their business dealings and directly promote environmental responsibility. J.P. Morgan Exchange-Traded Fund Trust – JPMorgan Equity Premium Income ETF was formed on May 20, 2020, and is domiciled in the United States.

The investment seeks current income while maintaining prospects for capital appreciation. The fund seeks to achieve this objective by (1) creating an actively managed portfolio of equity securities comprised significantly of those included in the fund’s primary benchmark, the Standard & Poor’s 500 Total Return Index (S&P 500 Index) and (2) through equity-linked notes (ELNs), selling call options with exposure to the S&P 500 Index. Benchmark: S&P 500 TR USD

QYLD Fund Profile

Global X Funds – Global X NASDAQ 100 Covered Call ETF is an exchange traded fund launched and managed by Global X Management Company LLC. The fund invests in public equity markets of global region. The fund invests directly and through derivatives in stocks of companies operating across diversified sectors. It uses derivatives such as options to create its portfolio. It invests in growth and value stocks of large-cap companies. It seeks to track the performance of the CBOE NASDAQ-100 BuyWrite V2 Index, by using full replication technique. Global X Funds – Global X NASDAQ 100 Covered Call ETF was formed on December 11, 2013, and is domiciled in the United States.

The investment seeks to provide investment results that closely correspond before fees and expenses, generally to the price and yield performance of the CBOE NASDAQ-100® BuyWrite V2 Index (the “underlying index”). The fund will invest at least 80% of its total assets in the securities of the underlying index. The CBOE NASDAQ-100® BuyWrite Index is a benchmark index that measures the performance of a theoretical portfolio that holds a portfolio of the stocks included in the NASDAQ-100® Index, and “writes” (or sells) a succession of one-month at-the-money NASDAQ-100® Index covered call options. It is non-diversified. Benchmark: CBOE NASDAQ 100 BuyWrite V2 PR USD