Advisors weigh use of covered-call ETFs as S&P 500 keeps rising
The S&P 500 keeps climbing, but that hasn’t stopped advisors from running for cover – covered calls, that is.
At least not yet.
The S&P 500 soared more than 24% in 2023 as investors piled into stocks, especially the so-called Magnificent Seven big-cap tech names that have been fueled by the promise of AI. In the end, it was a pretty remarkable result considering the repeated recession calls by Wall Street economists throughout the year.
Nevertheless, despite that impressive return, investors did not fully forget the pain of the almost 20% S&P 500 sell-off in 2022. That’s partially evident from the increase in inflows into covered-call ETFs in 2023. Advisors and investors stepped up their use of these hedged products to the tune of more than $20 billion in inflows last year, bringing the product total past $60 billion, according to Morningstar.
A solid portion of those flows went into the category leaders JPMorgan Equity Premium Income ETF (JEPI) and JPMorgan Nasdaq Equity Premium Income (JEPQ) which at last check boasted assets of $31.6 billion and $9.5 billion, respectively.
Covered-call ETFs use options strategies to generate high yields, reduce portfolio volatility and offer some safeguard when stocks fall. To guarantee that downside protection, however, they simultaneously sacrifice upside.
And capturing that upside has remained all the rage so far in 2024. The appetite for stocks remains undiminished with the S&P 500 jumping over 5% year-to-date. The bellwether index is now flirting with the record 5000 level.
The big question now facing covered-call ETF holders is whether they should banish those bear market memories and let their index holdings ride uncovered.
Stephen Kolano, chief investment officer at Integrated
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