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I have been evaluating covered call ETFs anchored on the S&P 500 and I want to give a balanced opinion on this investment product. I am neither recommending nor rejecting it.
We all know the basic arguments (income, protection, tax benefit, capped upside, no long-term growth, etc.), but I want to dig deeper based on historical data to understand each component better.
Disclaimer: Backtests were provided by Claude
**Arguments for:**
1. One major reason to attack these ETFs is to point out the long-term underperformance (especially using recent data, when we are in a multi-year bull market). To me, these ETFs are in their own league. They shouldn't be compared on "long-term growth rate" to the S&P 500 index. They just won't win, due to the intrinsically smaller beta play. It is like comparing a 60/40 portfolio to 100% equity. If you accept lower growth with lower risk, then it sits comfortably in the middle of the spectrum between bonds and stocks.
2. Call writing itself is not necessarily a flaw, but a feature. Historical data shows implied volatility slightly outruns realized volatility, which means there is actually a premium to be gained over the long term. Critics love to use "call writing caps your upside" as a reason why this is a bad idea. However, if call writing kills returns, then buying those calls would have made a fortune. Why wouldn't those critics just go scoop up those written calls? Due to CC ETFs, there should be plenty of supply.
**Arguments against:**
1. I am using SPYI as an example (data from Jan 20 holdings on Neos site). It holds S&P 500 stocks and writes calls in the following manner, as of Jan 20 open:
|Portion|Monthly Cap|
|:-|:-|
|37%|\~1% OTM|
|37%|\~2% OTM|
|26%|Uncapped|
If the 1-2% OTM call is a routine, the monthly cap is brutal. The annual drag is so large, and call premiums at 1% will struggle to recover it, especially in a bull market.
S&P 500 monthly returns, 1997-2025:
|Monthly Cap|Months Capped|Annual Drag over SP500|
|:-|:-|:-|
|1%|53%|\-14%/yr|
|2%|38%|\-9%/yr|
|5%|8%|\-1.4%/yr|
1. For the S&P 500, if you take out the top 20 performers each year and only buy the S&P 480 for the past 25 years, your overall return will be 0%. Similarly (and even more brutally), if you buy the S&P 500 and take out the top 2% best performing days, your overall return will be negative (extrapolated from the AQR paper). That's why it is so hard to beat "long-term broad index" investing. Choosing stocks is like buying a lottery with 4% chance to win. Choosing days is like buying that lottery with 2% chance to win. So, what's the solution? Would you buy them all but cap the gains for every stock to 2%? You probably would not. The same argument goes with trading days—you don't want to miss out on those best days.
I think this is the place to post, but if it belongs somewhere else, please let me know.