Derivative income funds taking off as indexes won’t back off

investmentnews.com:

The S&P 500 returned an impressive 10.6 percent in the first quarter of 2024. And that was on top of last year’s more than 24 percent gain. That’s not bad for financial advisors seeking to curry favor with their clients.

It also might be why derivative income or covered-call funds are exploding right now as more advisors and investors believe the bulls might be on their last legs.

Or at least pausing to catch their breath before the next move higher.

In March, the covered-call fund category (both mutual funds and ETFs) totaled more than $84.6 billion in assets, up from $53.6 billion the prior year and $5.1 billion a decade ago, according to Morningstar. Such strategies generally pay high dividends and reduce the volatility in a portfolio, while still offering the hope of some capital appreciation, even if it is capped at some point.

Joseph Castiglie, chief investment officer at SYKON Capital, is certainly a fan of the strategy, saying the use of call or put writing funds offers a “seamless” opportunity to help enhance portfolio yield without the need to consistently monitor individual option positions and variables like assignment risk or options being exercised.

“You can own areas of the market that traditionally pay lower dividends, such as technology stocks, and utilize the higher realized volatility of those sectors to write options for larger premiums, as higher volatility increases option premiums, with all other variables being equal,” said Castiglie.

Barry Martin, portfolio manager of the $651 million Shelton Equity Income Fund, says he has seen substantial inflows over the past year as stocks continue to flirt with all-time highs. Unlike most other funds which sell index-calls on the S&P 500, Martin’s fund sells