How Covered Call ETFs Can Supercharge Your Passive Income
Covered call ETFs are an amazing investment tool. With just one trade, you can supercharge your passive income.
These ETFs are best for near-retirees, active investors, and anyone looking to increase the passive income in their portfolio.
How do they do it?
Covered call ETFs purchase a basket of stocks (Each ETF has a different focus) and then collect a steady stream of income by collecting premiums from selling call options.
The Cash flow is passed onto investors in the form of Dividend payments.
These ETFs are relatively new on the markets, and not as well-known as traditional ETFs. HOWEVER – they’ve become very popular among income-seeking investors.
Mechanics of Covered Call ETFs are Simple
At the core of a covered call ETF is the concept of holding a portfolio of stocks while simultaneously selling call options on those holdings.
A call option gives the buyer the right, but not the obligation, to buy the stock at a predetermined price (the strike price) by a specific date. In return, the seller of the option (in this case, the ETF) collects a premium.
If the stock price stays below the strike price, the ETF retains the premium and continues to hold the underlying stock. This process generates regular income, making covered call ETFs particularly attractive to those seeking steady dividend payouts.
A big advantage to covered call ETFs is the balance they strike between risk and reward.
While selling call options limits the ETF’s upside potential—because if the stock price rises above the strike price, the ETF must sell the stock at that price—it also provides a cushion in the form of the premium collected.
This premium serves as a buffer against minor declines in the stock’s price, making the ETF less volatile than pure equity funds.
Covered Call ETFs are perfect for investors who prioritize income and stability.
In a nutshell, Covered call ETFs provide the income investor with a few advantages… Regular income, reduced volatility, and some downside protection.
And because these ETFs typically hold a broad basket of stocks, they offer the same diversification benefits as traditional ETFs, helping to reduce the impact of poor performance from any single stock.
These ETFs are not without risk.
The most notable drawback is the capped upside potential.
Since the fund sells call options, it gives up the opportunity to profit from significant stock price increases. If you expect a very bullish market or expect strong growth, these covered call ETFs might not be the best investment.
Covered call ETFs are also not immune to losses. If we see a sharp decline in the market, the ETF can still lose value.
Biggest Covered Call ETFs
The top 5 covered call ETFs – based on assets held are:
- JPMorgan Equity Premium Income ETF (JEPI)
- Global X NASDAQ 100 Covered Call ETF (QYLD)
- Global X S&P 500 Covered Call ETF (XYLD)
- Global X Russell 2000 Covered Call ETF (RYLD)
- YieldMax NVDA Option Income Strategy ETF (NVDY)
Each of these ETFs focuses on a different part of the market, and some use slightly different covered call strategies.
The key for any investor is to determine first if these ETFs are right for your portfolio, and what your market outlook is. These ETFs perform best in steady markets, and may not be the best performers with a big rally or big pullback in the overall markets.
How to SUPERCHARGE Your ETF Portfolio
If you’re going to manage your own ETF portfolio, and really supercharge your passive income, you need to focus on three key things.
- Realize covered call ETFs are not a buy-and-hold strategy. Knowing when to exit Covered Call ETFs is a critical part of capturing, and holding onto your profits.
- Focusing on the right ETFs is critical. There are high-yield covered call ETFs and you need to understand when to add them to your portfolio, and when to shy away.
- It’s important to use leveraged ETFs in the right way. Leveraged ETFs can boost long-term returns in your portfolio, but these ETFs are not without risk.
Look, If you’re interested in learning more about generating both PASSIVE INCOME and ACCOUNT GROWTH, in just minutes, we’re hosting a webinar just for you.
Click here to join our “LIVE CASH FLOW WORKSHOP”
We’ll be introducing “The ETF Income Accelerator: 5 Minutes to Weekly Payouts and Lasting Leveraged Growth”
In this webinar, we’ll show you how to generate passive income + account growth in 5 minutes per week.
The workshop is on October 30th, at NOON Eastern time / 9 AM Pacific time.
Click here to sign up for free.
This post originally appeared at NetPicks.
Category: ETFs
