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Why Investors Are Pouring Billions Into Covered-Call ETFs

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Covered-call ETFs that use options strategies to generate exceptionally high yields have been immensely popular over the past couple of years. Investors have poured more than $20 billion into these ETFs in 2023 so far, per Bloomberg data.

In addition to high yields, these strategies generally reduce portfolio volatility, but investors should remember that there is no free lunch in investing. These strategies work best in sideways markets but underperform in strong bull markets. They provide some protection when stocks fall.

Last year, which was brutal for stocks, these ETFs fell less than the broader indexes. This year, however, stocks have staged a very impressive rally, and these funds are lagging.

Roni Israelov, CIO of Boston-based financial services firm NDVR, calls these strategies a “Devil’s Bargain.” His research shows trading options to generate income undermines investment returns.

The JPMorgan Equity Premium Income ETF (JEPI - Free Report) has gathered about $13 billion in new money this year and is now the largest actively managed ETF. The fund uses proprietary research to select about 130 stocks and then writes S&P 500 Index call options to generate income.

Amazon (AMZN - Free Report) and Microsoft (MSFT - Free Report) are the largest holdings in the fund, which is up about 5.5% so far in 2023.

The Global X Nasdaq 100 Covered Call ETF (QYLD - Free Report) buys the stocks in the Nasdaq 100 Index and then sells call options on the same index. Apple (AAPL - Free Report) and NVIDIA (NVDA - Free Report) are among the top holdings.

To learn more about JEPI, QYLD, the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ - Free Report) and the Global X S&P 500 Covered Call ETF (XYLD - Free Report) , please watch the short video above.

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