Hello again everyone, I hope this Friday finds you praising and thanking Jesus for all we’ve been given. Life is a mixed bag and it does seem at times to be more bad than good. Somehow, I think that’s the point, the worst of times precedes the best of times. So, if you’re reading this today, please hold on. Jesus will show up!
With that, I thought today I run a little fact or fiction on some common complaints against options based etf’s. There seems to be two very strict camps with regard to options based etf’s. One side loves the income and is generally trying to get as much capital invested as possible. The other, likens it to a dangerous poison. But which side is correct?
Unfortunately, I think both sides have merit. Let’s get into that.
Before I do, for those considering an options based etf. Here’s an article from Morningstar, “Should You Own a Covered Call ETF like JEPI?”
Post Agenda
- Common Myths
- Common Facts
- Are they worth the time?
Common Myth’s about Options Based ETF’s
Common Myth #1: You will lose money
Well, I have experience losing money in all sorts of ways so yes it could be true. However, the myth here is that losing money is some how relegated solely to those of us using such an investment vehicle. In it’s simplest form, these types of investments sacrifice upside potential for income today. That may not be a good trade off for some but it does achieve a goal for many others. I wonder if they feel like they’re losing money?
Common Myth #2: The Net Asset Value(NAV) will Erode
While this may be true for some. Looking at you Defiance. Ideally, this isn’t meant to happen and I would assume most fund managers don’t set out to watch their fund erode over time. I suppose they’re getting paid either way so it may not be the biggest concern. I don’t really know.
What I do know is they have a product that they want people to buy. The more money flowing in means more profit to them or there firms. Money flowing out could mean going back to the drawing board. Like any business, I’m certain they’ll aim to wring this shammy for all it’s worth. To do so, they’ll have to develop at least a mediocre rapport.
So, to answer the question. It’s possible, but isn’t the goal.
Common Myth #3: Growth is better than Yield
Sure, who doesn’t like to watch an investment grow. That said, might I remind you of 2020 where, for a period, growth wasn’t even on our radar. We were running damage control assessments and questioning every decision we’d made up to that point. I’m sure we would have all liked having the large dividends flowing into our account during that crisis.
Generally, a healthy options based etf will allow for some upside growth while still offering a higher yield. After all, a slowly decaying asset isn’t likely to attract much positive attention. If the fund is hoping to remain solvent then some level of growth shouldn’t definitely be at the core of the fund strategy.
Notable Facts about Options Based ETF’s
Fact #1: You will Earn an Income
True, but it may come at the cost of principal. It’s important to me to verify the fund has survived at least through a modest down turn with out reverse splitting. If that were always the inevitable outcome then trading the options strategy yourself would make much more sense. At least we could hold the bag until our asset rebounded.
That said, I haven’t yet witnessed the larger names in the space miss a dividend payment. Which means you will certainly earn an income through these assets.
Fact #2: You have Downside Protection
Yes, as hard as this is for some to believe. Its true. The very reason anyone would ever sell a covered call is to collect an income while their selected asset was declining in value. It makes zero sense to sell a call on something like NVDA that is rocketing higher every day.
The downside protection is limited to the premiums but it does exist. Consider JEPI vs SPY during 2022. During that time SPY fell by approximately 27% while JEPI only fell about 21%. It’s not the only reason to invest in an options based etf but it is one reason to consider.
Fact #3: Upside is Limited
It’s correct. The nature of selling covered calls means the upside line has been drawn at some level. Ideally, I’d prefer funds that don’t have a rigid 30 delta strategy or whatever. Those funds don’t have any flexibility to move the line. Even moving one strike higher or lower could make a huge difference over the course of a year or longer.
The upside is limited but the key here is that it isn’t non-existent. Too many options strategy etf’s are stuck selling calls at unfavorable strikes just to meet their prerequisite income level. That isn’t a recipe for success. It’s a recipe for selling too close to the money and capping any upside potential.
Are Options Strategy ETF’s Worth my Time?
I guess, like most of these facts or fictions, on the person. For me, they make sense. I’ve traded options for several years and generally enjoy it. By allocating a small amount of money to these funds I’m able to generate an income without the leg work of trading myself. Or the capital required to trade it myself.
To sell a covered call on an asset actually worth holding could take thousands. That barrier prohibits millions of people from participating. These etf’s bridge that gap and allow even someone with $500 to enjoy an income.
As I close, for comparison sake, let’s see what our $500 investor may have earned in income from a few relatively high dividend paying assets over the course of a year. I’ll close with what he may have earned using an options based etf.
| Dividend ETF | Income Received |
| SCHD | $15.65 |
| DGRO | $10.80 |
| EWZ | $41.00 |
| VNQ | $17.5 |
| BND | $18.15 |
| XLU | $14.70 |
| Options ETF | Income Received |
| SPYI | $60.00 |
| QQQI | $71.75 |
| FEPI | $128.15 |
| JEPQ | $49.55 |
| YMAX | $213.95 |
| IVVW | $49.75 |
As you’ll no doubt notice, the options based etf’s faired considerably better on income. Obviously this doesn’t account for growth among either category but if your goal is to have the investment spin off an income there is the proof. If it isn’t clear, I’m in favor of both sides. I invest more heavily into dividend growth etf’s while allocating some capital to the options etfs.
I may miss out on some growth doing it this way but my hope is to some day soon have these options based etf’s pay me to go on vacation.
God bless,
Jeff
