Why are covered call ETF’s often called “Enhanced ETF’s”?

Covered-call ETFs are sometimes marketed as Enhanced ETFs simply because the marketer wish to appeal to investors looking for “enhanced income”. The ETF is a popular investment among those looking for a way to supplement their regular income with a separate stream of revenue.

etfsAfter many years or financial turmoil in many parts of the world, people have grown wary. Will I be fired from my job and lose my salary? Will the company I work for be purchased by another company that carries out substantial wage-cuts? Will the interest rate on my mortgage loan be hiked up because the house used as collateral is dropping in value? Can I be sure that there will be money available to pay for may retirement? This is just a few examples of reasons why more and more people have began looking for passive or semi-passive streams of additional income. If you are between jobs, having a little bit of extra money coming in from an ETF can help you through a rough patch. If you receive substantially less money upon retirement than you planned for, having an extra source of revenue on the side can really enhance life quality in your golden years.

Sometimes there is a confusion between the terms leveraged and enhanced. While there are certain ETFs that do employ leverage techniques, there are also many that don’t. Just because an ETF is marketed as Enhanced ETF, this doesn’t mean that it is using leverage. Always check the detailed description of the ETF before you make any investment.

Enhanced index fund

An enhanced index fund is not the same thing as an enhanced ETF, but those who create an ETF can definitely use some of the techniques employed by the creators of enhanced index funds. You can therefore find EFTs that have notable similarities with the Enhanced Index Fund, and calling them Enhanced ETFs would definitely not be out of place.

An Enhanced Index Fund is a mutual fund that tracks an index (usually a stock market index, such as the S&P 500 Index) but with certain modifications to allow for one or more of the following:

  • Excluding certain securities (“cherry picking”)
  • More equivalent position sizes
  • Using leverage

The idea is to employ these little tweaks to make the Enhanced Index Fund beat the index. The same methods can be used by ETF managers.

Enhanced Index Funds are normally very actively managed and tend to have higher fees than traditional index funds. The turnover can be very high compared to most traditional index funds. If leverage is used, this can really increase the risk factor since the fund itself risks losing more money that what it invested.

Enhanced Index Funds are generally deemed to be more high-risk investments than traditional index funds, but there are individual variations here depending on the attitude of the active managers. The same is true for ETFs where the managers elect to use this type of tweaks.