Who Should Buy Covered Call ETF’s?

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Date posted: 05.14.2011 (2:26 pm) | Write a Comment  (0 Comments)

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As many questions as there exists regarding Covered Call ETF’s, I would say that this one is fairly simple. By conception, Covered Call ETF’s track an index like any other standard ETF. Then, as an additional feature, they give up some potential gains in exchange for higher income/dividends. That is a tradeoff that many would be more than happy to make. Who exactly? The short and easy answer is that this product is geared towards investors that want “Income” through dividends. Generally that would include dividend and fixed income receivers: These can be retired investors or they can simply prefer receiving additional income for a variety of reasons, here are a few:

-Fiscal reasons
-Uncertainty about the future
-Passive income investors
-Investors that think the market will be flat for some time
-Believers that total return is mostly determined by dividends
-Investors wanting more stability in their return

I think that the huge tendency that we have witnessed in recent years towards dividend investing is likely to get stronger and that will certainly translate into Covered Call ETF’s which target the same investors with a product geared towards their interests. I personally think that investors looking for passive income will love Covered Call ETF’s and this type of product will gain a lot of popularity.

If you use a financial adviser, chances are very good that this type of product will not be recommended to you. Not because it’s not a great product but simply because you can buy and hold this for many years and that is usually a losing proposition for your financial adviser. He will only get a commission on your entry trade and eventually on your closing trade but nothing in between. That compares to buying a mutual fund for you which will make the adviser money every month. Sure, you would end up paying more but the adviser will unfortunately do what’s best for him in many cases.

Is The Covered Call ETF Good For You?

Chances are that this product is a good fit for your needs & objectives, so I would simply recommend to keep learning about it.


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