Covered Call ETF’s are a fairly new product on the markets but they have gained popularity very quickly thanks to their unique characteristics. If you have not looked at how Covered Call ETF’s work, I highly recommend that you do it now, it is important to understand what you have in your portfolio. That being said, there are great benefits to owning Covered Call ETF’s and I thought I’d describe the main ones here:
-Diversification: One advantage of owning a Covered Call ETF is similar to any other index ETF, you can gain exposure to all the stocks that are included in the index which increases your diversification and diminishes your risk significantly.
-Income: You will find very few types of ETF’s that can come anywhere close to the yield that a Covered Call ETF can provide. Why? Because they tend to invest in dividend paying stocks but add to that premiums collected from those sold
-Low Fees: While Covered Call ETF’s are a bit more expensive than more standard ETF’s, their cost compared to almost any other more active strategy is remarkably low because of the economies of scale. Just try looking at would be invovled if you tried this stategy on your own.
-Long Term Strategy: By its structure, Covered Call ETF’s will have a yield that will be more volatile than certain blue chip stocks but it will also tend to be higher overall. One advantage is that you can easily buy this product and hold it for many years as the manager will be making the decisions inside to maximize both the income and total return of the ETF.
-Fiscal: In most cases, being taxes on dividends brings fiscal advantages compared to capital gains and while you should verify that it is your case, if it is you will end up paying less to the government and more to yourself over the long term thanks to the structure of these Covered Call ETF’s.
It might just be me, but I personally consider that Covered Call ETF’s are the best of both worlds, an indexed product (which over time has proven to be a smart way to invest) but with one twist… additional income and less price upside. It’s a trade that many would take in a heart beat.