Episode summary
How Investors Misunderstand Covered Call ETFs and Option Income Strategies including YieldMax ETFs
Money For The Rest Of Us
· · 32 min · Hosts: David · Guests: Samuel M. Hartzmark, David H. Solomon, Denitsa Tsekova, Vildana Hajric, Roni Israelov, Lars N. Nielsen, Nikunj Kapadia, Gurdip singh Bakshi
Summary
The episode argues that many investors misunderstand covered call and option-income ETFs by treating their distributions like free income. The host says those payouts are tied to the underlying stock’s expected price appreciation, so the strategy is really a tradeoff: premium income and dividends in exchange for giving up much of the upside while still bearing the downside.
Using long-run data on the Invesco S&P 500 BuyWrite ETF (PBP), the host shows the strategy has delivered much lower returns than the S&P 500 while only moderately reducing volatility. He says PBP’s 5.3% annualized return since 2007 compares with 11.3% for IVV, illustrating that covered calls can dampen volatility but also suffer from volatility drag and missed upside, especially in bull markets.
The host is more skeptical of single-stock products such as YieldMax’s MSTY, NVDY, and TSLY. He argues that these funds amplify the wrong risks: they still absorb the stock’s downside, cap the upside, and usually underperform simply owning the stock. By contrast, he says broad-based covered call funds such as JEPI or WTPI can have a role, but investors should expect something closer to mid-single-digit or low-single-digit-to-high-single-digit returns, not the headline distribution yield.
Key takeaways
- The host says the “free dividend fallacy” also applies to option-income funds: distributions come from foregone upside, not free cash.
- PBP has returned 5.3% annualized since 2007 versus 11.3% for IVV, while reducing volatility from 16.4% to 12.3%, showing the tradeoff in covered calls.
- The host estimates broad-based covered call strategies are more likely to produce roughly 5% to 8% annualized returns than double-digit returns.
- Single-stock YieldMax ETFs such as TSLY, NVDY, and MSTY have generally lagged the underlying stocks because they keep the downside and cap the upside.
- The host says volatility-risk-premium harvesting works better in broad indexes like the S&P 500 than in single stocks, where expected and realized volatility are too close.
Notable quotes
“dividends aren't free money”
“The return of IVV, the eyeshares core S&P 500 ETF was 11.3% annualized”
“The other thing to consider is that single stock, the academic research shows that single stocks don't have the same level of volatility risk premium”
“Don't fall into the dividend trap”
How the episode opens
Welcome to Money for the Rest of Us. This is a personal finance show on money. How it works, how to invest it, and how to live without worrying about it.
I'm your host, David Stein. Today is episode 557. It's titled Don't Fall in to the Dividend Trap.
Now, what do I mean by dividend trap? Well, there's something called the the free dividend fallacy. At times individual investors, even institutional investors, they they forget that dividends aren't free money.
For example, when I was an institutional investment advisor, this was in the early days, we would pull together performance reports for our our institutional clients. And one of the things you learned as as an analyst is that when a mutual fund pays a dividend, the price drops because it has cash that makes up its net asset value. And then when it pays the dividend, you see the drop.
And sometimes someone like an entity an entity like Morning Star, they might not pick it up right away. And and I often get uh emails from listeners like, "How did this this ETF lose so much money today? When in fact, what happened was whatever service they were using didn't pick up the dividend.
And so it looked like there was a bigger loss because the price dropped because of the dividend payout. And that's just how the math works. And so as an institutional advisor, sometimes we would be calling up the the mutual fund company and say, "Did you pay a dividend?
Cuz we're trying to figure out why it was it was a loss. So there are some traps when it comes to dividends. The other dividend trap is not recognizing that that dividends are not separate from capital gains.
For example, there there's surveys where 70% of individual investors in this survey didn't realize with an individual stock when it paid a dividend, in theory, the stock's price should drop.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- covered call etfs
- option income strategies
- yieldmax etfs
- dividend investing
- volatility risk premiums
Companies and tickers mentioned
- PBP
- JEPI
- WTPI
- TSLY
- TSLA
- NVDY
- NVDA
- MSTY
- MSTR
- Invesco S&P 500 BuyWrite ETF
- JPMorgan Equity Premium Income ETF
- WisdomTree Equity Premium Income Fund
- YieldMax TSLA Option Income Strategy ETF
- Tesla
- YieldMax NVDA Option Income Strategy ETF
- NVIDIA
- YieldMax MSTR Option Income Strategy ETF
- MicroStrategy
Watch the episode
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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Money For The Rest Of Us, this episode and its artwork belong to J. David Stein. Octagon is not affiliated with the show; this page is an independent summary.
