Latest news with #coveredcalls
Globe and Mail
14 hours ago
- Business
- Globe and Mail
SMCY Is an Income Hack on Supermicro
Key Points Option-writing and selling covered calls is a low-risk way of cash-monetizing existing positions in individual stocks. The strategy, however, comes with downsides, like limiting your net-upside potential. Cash-hungry growth investors looking for new picks for a tax-deferring retirement account may want to consider this ETF despite its relatively high expense ratio. Are you an income-seeking investor who also wants -- or needs -- growth? That's a bit of a pickle. After all, the more you have of one, the less you typically have of the other. There are some picks that let you have your proverbial cake and eat it too, however. While they're not a great fit for everyone's portfolio, option-writing-focused exchange-traded funds (ETFs) can provide ongoing dividend income in addition to offering you most of the benefits of owning stocks. There's even a handful of single-stock-focused option-writing ETFs. Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue » One of these ETFs worth a closer look right now is the YieldMax SMCI Option Income Strategy ETF (NYSEMKT: SMCY), which turns something like a position in Super Micro Computer (NASDAQ: SMCI) into an income-generating holding. Here's the deal. What the heck is option writing? Don't sweat it if you're not familiar with options; plenty of veteran investors aren't. The kinds of stock options that are bought and sold via an exchange just aren't something most people need to bother delving into. Still, there's nothing wrong with understanding them. You absolutely should understand options if you're going to consider any such income-producing exchange-traded funds -- even if you're never going to directly trade options for yourself. In the most basic sense, an option is a bet that a particular stock or index will make a particular move within a predetermined period of time. Call options are bullish bets. Put options are bearish bets. Like any other bet, you pay to make these wagers. Options are also legitimate securities, though, not only trading as such but priced in the familiar bid/ask auction format that allows their price to constantly change. A call option gains in value when the price of the underlying stock or index does, while a put option gains value when the underlying stock or index falls. Conversely, call options lose value when the stock or index in question falls, while put options lose ground when the index or stock at its basis gains in value. Here's the fun part for income-seeking investors: You don't just have to buy options and then hope to sell them for a profit in the future. You can sell options first, pocket the proceeds, and then aim to cover these trades in the future by buying them back at a lower price. Or, better still, just let those options expire altogether, essentially exiting the trade at no cost. That's option writing. There's risk, of course. The chief risk is just that you're forced to buy (or "cover") these option trades at a price above your initial sale price, locking in losses. Or, in the case of the covered call strategy that YieldMax is using with its ETFs, you could be forced to hand over shares of the underlying stock that are essentially serving as collateral for your option trade. In most cases, you'd be doing so while the stock in question is rallying, meaning you're missing out on much of that ticker's upside. This is why option selling can be such a tricky business. (If you still don't fully understand the idea, it might be worth rereading the section you just completed before proceeding to the next one.) How the YieldMax SMCI Option Income Strategy ETF works Enter the YieldMax SMCI Option Income Strategy ETF. Just as the name implies, the fund managers of the YieldMax SMCI Option Income Strategy ETF regularly sell call options against shares of Super Micro Computer that the fund already holds. This generates ongoing income, most of which is distributed to the fund's owners each and every month. However, in that the fund also owns a bunch of Super Micro Computer shares, holding this fund is somewhat akin to holding a stake in the stock itself. That's why the two investments generally move in the same direction, even if they don't move to the same degree. It usually works well enough. Although SMCY's net asset value (or market price) has unsurprisingly trailed the performance of SMCI since the fund launched in September of last year, it's also dished out $20.20 worth of per-share dividends -- or distributions -- during this time. That's about twice the ETF's current market price, almost keeping its total net return even with Super Micro Computer shares' performance during this stretch. It just delivered about half of this performance in the form of dividend income instead of capital gains. Indeed, SMCY's trailing-12-month dividend yield stands at just over 100%. Data by YCharts Just think it through, keeping the risks and downside in mind It seems almost too good to be true. You're getting the bulk of the net benefit of owning a great growth stock, but you're getting a big chunk of this benefit in the form of cash. In many ways, it is a great alternative to outright owning a stake in SMCI -- particularly for investors who like to constantly accumulate cash to fund new growth investments. There are downsides and risks worth considering, though. Chief among these risks is the underlying strategy of selling or writing options itself. Although the ETF's managers do a great job of balancing the inherent risk and reward of options trading, there are some risks that simply can't be managed away. In this case, the big risk is just that SMCI shares unexpectedly soar, and the fund is forced to hand over shares of Super Micro Computer in the midst of a rally. That, or the fund is forced to cover what are essentially "short" option trades by exiting these positions at a loss. Again, the call options that YieldMax is selling gain in value when SMCI rises, but that works against the strategy at work here. SMCY's managers want the value of the options they've already sold to lose ground. Sooner or later, it will happen. Even if it only happens occasionally, it can hurt the value of the fund in a hurry. The other downside is just the cost of managing such a fund. Unlike enormous index funds like the SPDR S&P 500 ETF Trust or the Vanguard S&P 500 ETF, the YieldMax SMCI Option Income Strategy ETF's annual expense ratio -- or management fee -- is hefty, at nearly 1%. Despite what many fund companies will argue, that does take a direct toll on net performance. Also, bear in mind that income-generating funds like this one tend to create a pretty big tax liability every year. Distributions are essentially dividends, after all. Still, there are some scenarios where an exchange-traded fund like this one makes sense for certain investors. Growth investors who would like some of their gains in the form of ongoing income, for instance, may be interested. That's particularly true if the position is going to be held within a tax-deferring retirement account. The key, of course, is just figuring out whether or not the underlying stock in question is worth owning in the first place. If you don't actually want to buy and hold Super Micro Computer, the income aspect of YieldMax SMCI Option Income Strategy ETF alone doesn't make it more attractive enough to matter. Fellow contributor Brett Schafer's got something to say about that. Should you invest $1,000 in Tidal Trust II - YieldMax Smci Option Income Strategy ETF right now? Before you buy stock in Tidal Trust II - YieldMax Smci Option Income Strategy ETF, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Tidal Trust II - YieldMax Smci Option Income Strategy ETF wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $699,558!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $976,677!* Now, it's worth noting Stock Advisor 's total average return is1,060% — a market-crushing outperformance compared to180%for the S&P 500. Don't miss out on the latest top 10 list, available when you join Stock Advisor. See the 10 stocks » *Stock Advisor returns as of June 30, 2025
Yahoo
15 hours ago
- Business
- Yahoo
AIYY Is an Income ETF Monster
AIYY pays a distribution yield of more than 100%. But it's mainly returning its investors' cash through those distributions. It's tethered to which has been highly volatile over the past year. 10 stocks we like better than Tidal Trust II - YieldMax Ai Option Income Strategy ETF › Over the past three years, Tidal Financial Group released several high-yield exchange-traded funds (ETFs) with jaw-dropping yields. One of the highest-yielding ones was the YieldMax AI Option Income Strategy ETF (NYSEMKT: AIYY), which was launched in November 2023 and currently pays a distribution rate of 100.8%. Many might scoff at any income investment that pays a monstrous 100% yield, but is it really a high-yield trap? To understand how an ETF like the YieldMax fund works, we should discuss covered call options. In a covered call, you sell a call on a stock you own by choosing an option with a strike price that's higher than the current share price and an expiration date in the future. The buyer pays you a premium for the call, and the value of that option varies according to the stock's volatility and its proximity to the expiration date. If that stock is still trading below the covered call's strike price at its expiration date, you'll keep your shares and the premium, and the buyer will leave empty-handed. But if the stock has climbed above the strike price, you'll keep the premium but end up selling your shares at that strike price. Many investors write covered calls on their own stocks to generate passive income. That strategy works well when the market trades sideways, but it can backfire during big rallies. To offer investors an alternative to handling the covered call strategy manually, Tidal launched covered-call ETFs, which are pinned to volatile stocks that pay out high premiums that support its distributions. The YieldMax fund mainly sells short-term calls (with strike prices 5% to 15% higher than the current stock price) each month to boost its distributions, while parking some of its excess cash in short-term Treasuries to earn interest. This particular ETF's underlying stock is (NYSE: AI), the divisive enterprise artificial-intelligence AI software maker that still trades more than 40% below its initial public offering (IPO) price. But unlike a regular investor, who writes covered calls to generate passive income, the ETF doesn't actually own any shares of Instead, the fund writes covered calls on a "synthetic" long position comprised of longer-dated call and put options instead of owning the stock. That approach requires less capital, since it doesn't need to buy 100 shares of for each covered call. If shares decline, the ETF's synthetic position is designed to match those declines. However, that requires perfect hedging, which can be challenging. Long-dated options used in synthetic positions also decay over time, and the fund needs to keep rolling those positions forward to keep up with shares. trades far below its IPO price, but its revenue growth accelerated again in fiscal 2024 and fiscal 2025 (which ended this April). And it recently extended its crucial deal with Baker Hughes, which accounts for over 30% of its revenue, for another three years. Those catalysts -- along with its fresh federal contracts, cloud partnerships, and generative AI tools -- could drive the stock higher over the next few years. But even if that happens, the YieldMax ETF will underperform stock as its covered call strategy limits its gains. Ideally, it can narrow that gap with its big distributions -- but the messy way it uses synthetic long positions could cause it to lag behind stock. To make matters worse, investors need to pay an annual expense ratio of 1.67% to execute the fund's convoluted strategy, which is much more expensive and confusing than simply buying shares and manually writing covered calls. That's a big part of why the ETF's shares declined 64% over the past 12 months as stock only fell 14%. Even if you had reinvested the fund's big distributions, you would have still ended up with a negative total return of 24%. Lastly, most of the ETF's distributions are a return of capital (ROC), which means it's mainly returning its investors' cash instead of generating any fresh income. That strategy is constantly eroding its net asset value (NAV) -- which has already dropped 64% over the past 12 months -- and will further limit its upside potential. That's why that 100.8% distribution yield doesn't mean you'll magically double your investment by buying its shares and waiting for the next distributions. That ratio simply means that if its most recent monthly distribution were paid out every month for a year, its total annualized payout would be equivalent to 100.8% of the ETF's current price. But that ratio looks backward instead of forward, and its monthly payouts could decline sharply if volatility declines or its stock crashes. The YieldMax AI Option Income Strategy ETF might seem like an income-generating monster, but it's a dangerous investment. You're mainly getting back your own money, you're being charged for it, and the ETF will still underperform stock if it rallies -- yet experience steeper declines if it pulls back. Investors should avoid it and stick with more-reliable dividend stocks instead. Before you buy stock in Tidal Trust II - YieldMax Ai Option Income Strategy ETF, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Tidal Trust II - YieldMax Ai Option Income Strategy ETF wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $699,558!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $976,677!* Now, it's worth noting Stock Advisor's total average return is 1,060% — a market-crushing outperformance compared to 180% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of June 30, 2025 Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends The Motley Fool has a disclosure policy. AIYY Is an Income ETF Monster was originally published by The Motley Fool
Yahoo
15 hours ago
- Business
- Yahoo
SMCY Is an Income Hack on Supermicro
Option-writing and selling covered calls is a low-risk way of cash-monetizing existing positions in individual stocks. The strategy, however, comes with downsides, like limiting your net-upside potential. Cash-hungry growth investors looking for new picks for a tax-deferring retirement account may want to consider this ETF despite its relatively high expense ratio. 10 stocks we like better than Tidal Trust II - YieldMax Smci Option Income Strategy ETF › Are you an income-seeking investor who also wants -- or needs -- growth? That's a bit of a pickle. After all, the more you have of one, the less you typically have of the other. There are some picks that let you have your proverbial cake and eat it too, however. While they're not a great fit for everyone's portfolio, option-writing-focused exchange-traded funds (ETFs) can provide ongoing dividend income in addition to offering you most of the benefits of owning stocks. There's even a handful of single-stock-focused option-writing ETFs. One of these ETFs worth a closer look right now is the YieldMax SMCI Option Income Strategy ETF (NYSEMKT: SMCY), which turns something like a position in Super Micro Computer (NASDAQ: SMCI) into an income-generating holding. Here's the deal. Don't sweat it if you're not familiar with options; plenty of veteran investors aren't. The kinds of stock options that are bought and sold via an exchange just aren't something most people need to bother delving into. Still, there's nothing wrong with understanding them. You absolutely should understand options if you're going to consider any such income-producing exchange-traded funds -- even if you're never going to directly trade options for yourself. In the most basic sense, an option is a bet that a particular stock or index will make a particular move within a predetermined period of time. Call options are bullish bets. Put options are bearish bets. Like any other bet, you pay to make these wagers. Options are also legitimate securities, though, not only trading as such but priced in the familiar bid/ask auction format that allows their price to constantly change. A call option gains in value when the price of the underlying stock or index does, while a put option gains value when the underlying stock or index falls. Conversely, call options lose value when the stock or index in question falls, while put options lose ground when the index or stock at its basis gains in value. Here's the fun part for income-seeking investors: You don't just have to buy options and then hope to sell them for a profit in the future. You can sell options first, pocket the proceeds, and then aim to cover these trades in the future by buying them back at a lower price. Or, better still, just let those options expire altogether, essentially exiting the trade at no cost. That's option writing. There's risk, of course. The chief risk is just that you're forced to buy (or "cover") these option trades at a price above your initial sale price, locking in losses. Or, in the case of the covered call strategy that YieldMax is using with its ETFs, you could be forced to hand over shares of the underlying stock that are essentially serving as collateral for your option trade. In most cases, you'd be doing so while the stock in question is rallying, meaning you're missing out on much of that ticker's upside. This is why option selling can be such a tricky business. (If you still don't fully understand the idea, it might be worth rereading the section you just completed before proceeding to the next one.) Enter the YieldMax SMCI Option Income Strategy ETF. Just as the name implies, the fund managers of the YieldMax SMCI Option Income Strategy ETF regularly sell call options against shares of Super Micro Computer that the fund already holds. This generates ongoing income, most of which is distributed to the fund's owners each and every month. However, in that the fund also owns a bunch of Super Micro Computer shares, holding this fund is somewhat akin to holding a stake in the stock itself. That's why the two investments generally move in the same direction, even if they don't move to the same degree. It usually works well enough. Although SMCY's net asset value (or market price) has unsurprisingly trailed the performance of SMCI since the fund launched in September of last year, it's also dished out $20.20 worth of per-share dividends -- or distributions -- during this time. That's about twice the ETF's current market price, almost keeping its total net return even with Super Micro Computer shares' performance during this stretch. It just delivered about half of this performance in the form of dividend income instead of capital gains. Indeed, SMCY's trailing-12-month dividend yield stands at just over 100%. It seems almost too good to be true. You're getting the bulk of the net benefit of owning a great growth stock, but you're getting a big chunk of this benefit in the form of cash. In many ways, it is a great alternative to outright owning a stake in SMCI -- particularly for investors who like to constantly accumulate cash to fund new growth investments. There are downsides and risks worth considering, though. Chief among these risks is the underlying strategy of selling or writing options itself. Although the ETF's managers do a great job of balancing the inherent risk and reward of options trading, there are some risks that simply can't be managed away. In this case, the big risk is just that SMCI shares unexpectedly soar, and the fund is forced to hand over shares of Super Micro Computer in the midst of a rally. That, or the fund is forced to cover what are essentially "short" option trades by exiting these positions at a loss. Again, the call options that YieldMax is selling gain in value when SMCI rises, but that works against the strategy at work here. SMCY's managers want the value of the options they've already sold to lose ground. Sooner or later, it will happen. Even if it only happens occasionally, it can hurt the value of the fund in a hurry. The other downside is just the cost of managing such a fund. Unlike enormous index funds like the SPDR S&P 500 ETF Trust or the Vanguard S&P 500 ETF, the YieldMax SMCI Option Income Strategy ETF's annual expense ratio -- or management fee -- is hefty, at nearly 1%. Despite what many fund companies will argue, that does take a direct toll on net performance. Also, bear in mind that income-generating funds like this one tend to create a pretty big tax liability every year. Distributions are essentially dividends, after all. Still, there are some scenarios where an exchange-traded fund like this one makes sense for certain investors. Growth investors who would like some of their gains in the form of ongoing income, for instance, may be interested. That's particularly true if the position is going to be held within a tax-deferring retirement account. The key, of course, is just figuring out whether or not the underlying stock in question is worth owning in the first place. If you don't actually want to buy and hold Super Micro Computer, the income aspect of YieldMax SMCI Option Income Strategy ETF alone doesn't make it more attractive enough to matter. Fellow contributor Brett Schafer's got something to say about that. Before you buy stock in Tidal Trust II - YieldMax Smci Option Income Strategy ETF, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Tidal Trust II - YieldMax Smci Option Income Strategy ETF wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $699,558!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $976,677!* Now, it's worth noting Stock Advisor's total average return is 1,060% — a market-crushing outperformance compared to 180% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of June 30, 2025 James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy. SMCY Is an Income Hack on Supermicro was originally published by The Motley Fool Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Globe and Mail
3 days ago
- Business
- Globe and Mail
Do covered call strategies shine in ‘flat markets'? The answer may surprise you
As a child, I sat too close to the TV, cracked my knuckles, and swallowed more than a few pieces of gum. If all of the legends I heard in childhood were true, I would now be a visually-impaired, middle-aged man with arthritis and tummy full of undigested gum. I cannot escape aging, but thankfully, those other things proved to be myths. Life is full of myths and misconceptions – and the investing world is no exception. Covered call writing strategies are the subject of some of the most persistent investor misunderstandings. Promoters of covered calls writing strategies argue that the strategy excels in flat or range-bound markets. The argument goes something like this: While selling call options gives away upside, the strategy's premium cash flow should fuel outperformance in 'flat' markets or periods when stock prices just plod along in a narrow range. This claim is best split into two parts – the nature of flat markets and performance during these periods. Definition and nature of 'flat markets' When people speak of flat markets, they are referring to a meaningful time period – e.g., at least a few years – where stock markets end close to where they began. Such periods have historically been marked by steep declines followed by sharp recoveries. In other words, so-called flat markets are almost always very volatile. Using more than a century of U.S. stock market monthly total returns, I isolated flat market periods – which I defined as total returns ranging from -1% and +1% per year over five- or ten- year periods. The tables below summarize annualized total returns and volatility for the flat market periods identified. While flat markets can boast lower-than-usual volatility, seven of the nine time periods in the above tables experienced above-median volatility. The chart below breaks down one such period, which is one of the least volatile. U.S. stock returns clocked in at just 0.5% per year for the decade ending on September 30, 1974. This period sported increasingly strong bull market runs, each followed by punishing declines – ending the period barely above the level from ten years earlier on a total return basis. From the table above, this flat market featured volatility close to the historical median for past overlapping 120-month periods. Virtually every other period in the above tables was more volatile than this. There is nothing flat about 'flat markets' – but rather a series of wild up and down swings in market value. Performance in flat markets and over time To address the question of performance, I examined the performance of two US-based exchange traded funds (ETFs). The Invesco S&P 500 BuyWrite ETF (PBP), launched in December 2007, buys the stocks in the S&P 500 Index and sells options on about ninety percent of its holdings. Its seventeen-year history includes one flat market period. I selected the SPDR S&P 500 ETF Trust (SPY) as its benchmark because it holds the same index stocks but without the covered call writing (or any other option strategy). The table below summarizes selected performance statistics for these two ETFs. Invesco's covered call ETF (PBP) has underperformed State Street's SPY (a simple S&P 500 Index ETF) by a mile over more than seventeen years – by nearly six percentage points per year. During the period closest to the flat market identified in the first set of tables above, Invesco's covered call ETF slightly lagged SPY's pure stock exposure. It was not all bad for PBP (the covered call ETF). From its inception through March 9, 2009, SPY's pure stock exposure resulted in a 52% decline. The cash flow from PBP's option selling meaningfully cushioned the loss, resulting in a 39% fall. I noted the downside protection in my May 2023 article on covered call strategies. But I also highlighted in that article that investors give up a lot of upside. From March 9, 2009, through October 2012, PBP significantly lagged its simpler counterpart SPY. The upside that covered calls gave up was much larger than the downside cushion on the way down. The result: slight underperformance in what is supposed to be an ideal market environment for PBP and other similar funds. The table below summarizes these decline and recovery statistics. Since five- and ten- year periods are not the only meaningful time frames, I also looked at SPY's total returns over one- to four- year periods using daily data to spot a greater number of flat markets. I found a dozen or so different time periods during which SPY was flat. PBP's covered call strategy underperformed two-thirds of the time – with an average underperformance of more than 1% per year across all periods measured. Calculations by author using monthly total returns for U.S. stocks from a variety of sources (Dr. Robert Schiller, CRSP, Corp, Morningstar, iShares) for Feb-1871 through Dec-2024. Total Returns and Volatility shown in the table are average annualized figures. Medians are calculated on 'rolling' (i.e., overlapping) five- and ten- year periods included in the measurement period. Volatility is measured by calculating an annualized standard deviation for the stated time periods. Standard Deviation measures how far each monthly return deviates from its average over the specified period. Dan Hallett is vice-president, Research and Principal, for Highview Financial Group
Yahoo
6 days ago
- Business
- Yahoo
I Have $4 Million -- Will My Plan to Invest for $27,000 Monthly Work?
Writing "covered" call options generates immediate, tangible net income. This income is also inconsistent, and the strategy always underperforms long-term market gains. High-yield ETFs that rely on selling options for distributable income should only make up a minor part of an income portfolio's allocation. 10 stocks we like better than JPMorgan Nasdaq Equity Premium Income ETF › As always, The Motley Fool cannot and does not provide personalized investing or financial advice. This information is for informational and educational purposes only and is not a substitute for professional financial advice. Always seek the guidance of a qualified financial advisor for any questions regarding your personal financial situation. If you'd like to submit your question for feedback, you can do so here. High-yield exchange-traded funds (ETFs) aren't exactly new, including ones that generate income by selling -- or "writing" -- options on the stocks held within the fund. As the market becomes less predictable and more difficult to navigate, though, income-producing investments that generate lots of immediate cash are becoming very popular, and understandably so. Once this cash is in your proverbial pocket, it's no longer at (much) risk of unexpectedly losing value. As is always the case with any investment, however, these particular investments come with a downside that must not only be understood but also managed. A well-funded individual investor recently asked an entire Reddit community what it thought about a plan to invest $4 million in a trio of high-yielding ETFs, two of which regularly use the aforementioned strategy of selling call options on stocks the funds already own. Will this actually work? What Am I missing?by u/Ddash-3 in dividends Here's an answer highlighting some other important details that similarly minded investors may want to consider before plowing into this plan. What does it mean to sell covered call options? A call option is a bet that a particular security or index will be at or above a specific price by a specific point in the future. As is the case with any bet, though, you pay to make it. Call options -- like their bearish counterpart "put" options -- are also securities in and of themselves, and are bought and sold at ever-changing prices that reflect the market's ever-changing assumptions about their value. As with most stocks, you don't actually have to buy an option first to sell it at a higher price later. You can sell or "write" an option you don't already own and collect the cash proceeds, and then buy or "cover" that trade later at what's hopefully a lower price. In JPMorgan Chase's case, with its JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ: JEPQ) and its JPMorgan Equity Premium Income ETF (NYSEMKT: JEPI), the plan isn't to buy the call options it's selling back at a later date. The goal is largely to let that option expire altogether, which effectively closes out the position with a buy price of nothing. All the initial sale proceeds become profit. But what if the call in question gains in value before it expires? JPMorgan is "covered" in the sense that it already owns shares that it can deliver if the call options it writes are exercised against it. (A call option is also a contract to deliver shares of a particular stock, after all, if the buyer of that call so chooses.) Fund managers can also exit short-term option trades at a loss and just move on to the next one. For both of these ETFs, this option-selling is constantly happening, generating cash flow that's dished out to investors on a monthly basis. As of the latest look, JEPQ's annualized payout yield stands at 14.5%, while JEPI's is an impressive 11.4%. Not bad. You can certainly see why this investor likes the idea of leaning into these two ETFs with his $4 million. These funds aren't without their downsides, though. Writing covered calls isn't a strategy that consistently beats the market in the long run. It just monetizes the market's long-term growth by converting what would have otherwise been capital gains into tangible cash. Even then, it doesn't completely keep up. As the chart below illustrates, despite its big dividend payments since its launch in mid-2022, the total return on the JPMorgan Nasdaq Equity Premium Income ETF still lags its benchmark Nasdaq-100 index. The JPMorgan Equity Premium Income ETF's net performance has been just as disappointing compared to its benchmark in the S&P 500 since its inception in 2020. It's also worth noting that while the annualized yields on both funds are currently sky-high, that's based on dividends that haven't exactly grown ... or even been consistent. Our investor's plan to invest $17,000 worth of excess monthly investment income into the Vanguard S&P 500 ETF (NYSEMKT: VOO) may be challenged by the sheer inconsistency of these two ETFs' dividend payments. In some months, it could be even less than the $10,000 the investor needs to live on. Blame the strategy of selling call options on stocks you already own, mostly. It works better some times than others, and sometimes, it doesn't work at all. Covered call strategies notoriously underperform when the market is rallying the most, for instance, by bolstering the value of the call options you've already sold that you now want to lose value. Also note that neither of these funds is particularly tax-friendly, by virtue of perpetually generating a fair amount of taxable income. In this vein, our investor didn't clarify how much of that $4 million was in an IRA, or how old they are. Some of that presumed $27,000 in monthly investment income could be subject to taxation, though, and that assumes the investor won't also be penalized for making early withdrawals from retirement accounts. This will reduce the total amount of net income the investments are generating. So why would anyone want to own either of these two ETFs, or any like them? Don't dismiss the value of owning an income-producing investment, even if that income can be inconsistent, or even if your net performance ultimately lags that of the overall market. Bonds underperform stocks too, but they still have their place in plenty of people's portfolios. The inconsistent income that the JPMorgan Nasdaq Equity Premium Income ETF and the JPMorgan Equity Premium Income ETF offer doesn't make them a great option for investors who need predictable cash flow. If you've got enough accessible cash to smooth out the rough edges, however, these two funds have their place, too. The basic premise is reasonable enough as long as you know that exchange-traded funds like the JPMorgan Nasdaq Equity Premium Income ETF and the JPMorgan Equity Premium Income ETF will ultimately underperform their benchmarks despite their strong yields. They're not growth investments. They're income investments, and they do that job nicely, even if not consistently. In this instance, however, accepting a little less real-time cash return in exchange for far more predictable cash flow makes sense. While it will be tough to match the big yields that JEPI and JEPQ currently boast, you can get reasonably close with alternatives like preferred stocks and higher-yield "junk" bonds that would dramatically diversify this investor's holdings. A bit more exposure to the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) already in the hypothetical portfolio would help, too. It's yielding just under 4% right now, which isn't much compared to JEPI and JEPQ. But it's a yield based on dividend payments that are much more consistent. And predictability means a lot when your portfolio needs to perform a minimum way right out of the gate. This particular investor may also want to consider positioning for a little more capital appreciation that can't happen with the current plan. The investor didn't mention their age, but if they're going to live another 15 years or more, inflation and a couple of unexpected black swan events could take a sizable bite out of their future buying power. Diversifying the kinds of strategies they're using will help just as much as diversifying the kinds of stocks they're holding. Bottom line? There are no market-beating tricks in the long run. Successful investing is still largely a game of patience won by people who know and understand all their risks and manage them accordingly with diversification. 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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy. I Have $4 Million -- Will My Plan to Invest for $27,000 Monthly Work? was originally published by The Motley Fool
