Needless to say that we made this intro to Covered Call ETF’s website because we believe in the product and think it can provide a good source of passive income. We did also list 5 benefits of Covered Call ETF’s. However, I think it’s important to understand that like every other product, Covered Call ETF’s are not without some downsides and there. If you have not done so, I highly recommend that you take a look at our explanation of how Covered Call ETF’s work. Without further wait, here are some of the downsides to this emerging product:

-Trading Costs: As we explained, this strategy requires a fairly active level of trading which do come at a significant cost. Why? Mainly because of the rolling of the options month after month. This is especially true of funds that write calls on many different stocks.

-Management Costs: Running a passive index fund such as SPY (in the US) and XIU (in Canada) doesn’t require that much skill or active management. On the other hand, running a Covered Call ETF requires active analysis of all the options that are either owned or potential ones and that requires much more work from the ETF manager. Those costs are passed on to investors through the management fees which are much more extensive in Covered Call ETF’s.

-Will under perform in “fast” upward trending markets: By conception, Covered Call ETF’s sell upside potential. What does it mean? In periods following a stock market crash, when the markets generally rises quickly, these funds will generally under perform significantly.

-Not truly passive investing: We are part of the majority that believes that index investing generally is the best long term solution and while Covered Call ETF’s like to compare themselves to index ETF’s, they are very different by the fact that they are “Actively managed”. I would however say that these funds do have fairly strict guidelines which does make them “more passive than active”.

-Transparency: Unlike truly “passive ETF’s”, most investors do not know exactly what the manager is doing in this fund and while it’s not as much of a problem as hedge fund for example, I always prefer knowing exactly what I’m buying.

As you can see, Covered Call ETF’s are far from perfect and while they do they have many great benefits, those do come at a cost. The most important downsides are certainly the added costs in my opinion.