True that the investor behavioural lure is strong. Investors have long been infatuated with products paying fat cash distributions. Sometimes it makes sense to lean into behavioural tendencies. But with covered calls, the psychological comfort is costly.

If you rely on covered calls to fund your financial freedom, you won’t be free any time soon. 😉

To be clear, while covered call ETFs do pass along dividends received from the stocks the fund owns, most of the cash distributions are not “income” or “yield”.

Read the full article on our blog: highviewfin.com/blog/are-cover…

And be sure to check out this video on covered calls by Ben Felix, who doesn’t hold back in his criticism (for good reason). https://www.youtube.com/watch?v=ygVObRx9X68

Selling options that expire unexercised triggers a cap gain. Buying back the options triggers a loss to offset gain. Some CC funds do this for greater tax efficiency, but this also raises trading costs. In time newer ETFs will have enough history for a meaningful long-term analysis.

I chose these ETFs because most CC ETFs are sector funds. To test whether the outcome was a fluke of ZDY/ZWH, I applied the same analysis to other ETFs (eg, ZEB & ZWB). Not incl in the article but similar outcome. ZEB investor was better off than in ZWB, but by a smaller amount.

…each investor received the identical amt of after-tax cash flow. CC investor paid more tax & was left with nearly $300k LESS in ending market value at the end of ten years.

Pure, simple equity exposure (no options) & selling units to top up cash flow was more efficient than CC

The ZDY investor takes cash distributions (less than ZWH) & sells units each month to get the same amt of cash as ZWH investor. Each treats their respective ETF as the sole cash flow source – selling units each Apr to pay prior year taxes (incl impact of unit sales). By design…

I created a model of two hypothetical investors, each investing $1M in two different ETF – BMO US High Dividend Covered Call ETF (ZWH) and BMO US Dividend ETF (ZDY).

Both investors take all distributions in cash. In addition…

CC strategies underperform in most environments, including “flat markets”.

Exception: flat markets that last no more than a year.

I expand on these details & more in my latest article. www.highviewfin.com/blog/do-cove... 4/4

“Flat Markets” are not flat at all, but periods marked by strong upward surges followed by punishing declines – aka plenty of volatility. Example 👇 3/4

Proponents argue that the cash flow from selling call options should provide robust outperformance of the market simply plods along sideways for a few (or many) years. But it’s rare to see periods with such stability. My analysis uncovered a few key findings. 2/4

Yes, mean reversion but framing it differently. And highlighting how significantly rising multiples have boosted returns - and what returns look like when that tailwind turns into a light breeze of a headwind.

Most have not looked at it that way and are expecting more big returns.

Very true - and great perspective. There are many moving parts and it takes a robust retirement plan to make sure you're making smart decisions on each.

I just received the same request!

Is it a broker SMA account? With such small positions & the # of holdings, that was my first thought. In mid-2000s, I guided a client out of a SMA that had 100+ stock positions chosen by 2 active mgrs.

Very expensive for broker to liquidate. Client's son did it via discount broker & saved a bundle.

He also highlights (I'm paraphrasing): They say they're selling dollar bills for $3. That sounds great....until you realize that you're they're selling those dollar bills to you (those buying newly-issued MSTR securities).

Nice write-up Michael. I enjoyed reading your exchange with Larry and this resulting article.