Bank of America sounds warning on options-ETF boom

investmentnews.com:

Over the last two years, Wall Street has convinced cautious equity investors to send billions of dollars into exchange-traded funds that use options to goose yields. 

A vocal chorus of analysts has been warning against this booming trade, to no avail. Assets in the derivatives-powered ETFs have quadrupled to $69 billion.

Now Bank of America Corp. is joining the ranks of skeptics, saying such products often fare worse than simpler alternatives. After crunching performance data, the US bank finds that a vanilla bet on dividend-focused ETFs probably serves most investors better. 

“The value really isn’t there,” said BofA strategist Jared Woodard in an interview. “Investors who are looking for the highest total returns or just capital gains should probably look elsewhere.”

Sold by firms including JPMorgan Chase & Co. and Global X ETFs, the strategies — which own stocks and trade options on the side to raise extra money — have a been a minor craze since the 2022 bear market, when they massively outperformed equity indexes. Over half of the 75 covered call products tracked by Bloomberg have been launched in the last 16 months. 

BofA’s warning echo other naysayers who note selling call options against stocks — “overwriting” in technical parlance — worked particularly well back in 2022, because the market was in free fall and bullish bets were seldom cashed in. In other environments, market machinations create drags on the ETFs that are harder to overcome.

Two of the most popular products, the JPMorgan Equity Premium Income ETF (ticker JEPI) and the Global X Nasdaq 100 Covered Call ETF (QYLD), illustrate the issue. In 2022 when stocks plunged, JEPI and QYLD beat the S&P 500 and Nasdaq 100 by about 15 and 13 percentage points