Why do covered-call ETFs yield so much?
They sell some of their future upside and pay you the proceeds today. Here's the trade-off.
Covered-call ETFs often advertise double-digit yields. The reason is simple: they sell some of their future upside, and pay you the proceeds today.
How they work
The fund holds stocks, or tracks an index, and sells call options on them. An option buyer pays a premium up front for the right to buy at a set price later. Those premiums, rather than dividends, fund most of the high monthly payouts.
The trade-off
If the market rallies past the option's price, the fund gives up the gains above it. If the market falls, it still takes most of the drop. Premiums also shrink when markets are calm, so payouts can vary from month to month. Over a long bull market, that can mean a covered-call fund lags the index it's built on, even with the bigger yield.
What to check before you buy
Look at total return, meaning price change plus payouts, not just the yield. Watch the NAV trend over a few years. And check how much of each payout is labeled return of capital, using the fund's Section 19(a) notices.
The short version: you swap some upside for income now. Judge these funds on total return, not yield.
For information only. Not financial advice.