PORTFOLIO STRATEGY

Covered Call ETFs Have Exploded In Popularity — Just In Time For Investors To Lose Their Money

Congratulations, America: the market is on fire again! The S&P 500 has hit 16 all-time highs this year, retail investors are back, and Big Tech earnings are looking solid. But if you’ve lived through 2018, 2020, and even 2022, you’ve seen the market rise and fall through the pandemic, interest rate cycles, and trade wars.

Now, with market and economic conditions that could make Michael Burry tweet another cryptic doomsday warning, investors are wondering: Should they cash out or hang tight? Well, this time, institutions have an alternative option on the table — and they’re eager to sell it to investors in the form of covered call exchange-traded funds (ETFs).

Another option: Covered call ETFs offer investors a way to hold their stocks while generating some extra cash from options trading — and the best part is that investors don’t have to mess with options themselves; the fund managers handle it all. These funds sell call options, which pay premiums and only cost investors if the market drops. The premiums collected are then passed on to the ETF holders. That’s why these funds are ideal for investors betting on a market downturn.

• They’ve become so hot in the last couple of years that the amount invested in them has quadrupled to $69B, with two of the most popular funds, $JEPI and $QYLD, holding over $40B of the total assets.

• Bloomberg says 75% of covered call ETFs have been launched in the last 16 months, with heavy hitters like BlackRock ($BLK) and Fidelity Investments debuting their own options ETFs this year.

Not all portfolios are created equal

And whether they’re good for investors or if investors even understand them is a different story. When stocks tanked in 2022, these covered call ETFs outperformed markets — but this year, as stocks soared, they’ve underperformed indexes by double digits. Global X’s Rohan Reddy says this is an intended side effect, since investors in options ETFs are okay with sacrificing higher returns for income. Still, investors are paying a sky-high 0.61% management fee for his Nasdaq 100 Covered Call ETF ($QYLD) despite its lackluster returns.

• In an experiment this year, Bank of America found that selling one-month call options every day would have resulted in a whopping 24% annualized loss.

• They suggest that “Investors who are looking for the highest total returns or just capital gains should probably look elsewhere” in a note comparing options and standard ETFs.

Time’s not exactly on their side, either: While Susquehanna’s Chris Murphy says these funds could be great for investors expecting a market drop, most folks are better off sticking to vanilla ETFs with lower expense ratios — allowing their money to appreciate long-term. But the demand for “riskless” products keeps growing. Just look at Calamos Investments’ latest ETF filing — they’ll be the first to launch an ETF with 100% downside protection.

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LARGECAP RECAP

💼 Where have the jobs gone? Latest US jobs report shows big slowdown.

First, it was GDP growth. Next, it was discretionary spending. And now, they’re coming for our jobs. After a banner few years for the US economy, the latest data is beginning to tell a different story. In April, the US only added 175K jobs — while the unemployment rate stayed put at 3.9%.

• Virtually all of the job growth was concentrated in education and health services (+95K), transportation and warehousing (+21K), and retail trade (+20K).

• But there were some areas that saw fewer jobs, with the information sector (-8K) leading the losses — followed by professional and business services, and mining and logging.

Horsemen of the apocalypse recession: Economic data reflected optimism and strength in the US economy during the pandemic, but now we might be heading into slower territory. Although April’s job gains were the lowest since Oct. 2023, the labor market has bounced back with strong hiring to start the first quarter. This time around, though, there’s little hope that the Fed will unwind high-interest rates anytime soon. That might make businesses hold off on hiring or expanding until things look a bit clearer.

Markets & Economy

Microsoft ($MSFT) bans police from using its AI services for facial recognition: The Azure platform’s terms of service now bars “any law enforcement globally” from using AI to identify people — a week after weapons tech company Axon ($AXON) came under fire for using GPT-4 to summarize body camera audio. [Read]

Analyst gives Meta ($META) a sell rating: BNP Paribas’ Stefan Slowinski, known for his contrarian views, joined a chorus of investors who are concerned about Zuckerberg’s plan to pour billions into AI — without surefire revenue streams in the near term. [Read]

How long will Warren Buffett’s big Apple ($AAPL) bet last? The Oracle of Omaha’s uncharacteristic bet on the tech juggernaut has led to ~$120B gains for Berkshire-Hathaway ($BRK.A) — but with Buffett stepping back and Apple showing signs of weakness, some wonder if it’s time to change course. [Read]

Business & Wealth

Medical debt still haunts credit reports: Despite a decrease in recent years, 15M Americans still struggle with medical debt weighing on their credit scores, making it harder to qualify for loans — which the Consumer Financial Protection Bureau wants to change. [Read]

Tech’s major borrowers have to pay up: Lenders with loose standards doled out big loans to tech companies that promised runaway growth — but since then, borrowing costs have risen, and tech growth has stalled (outside of a few major players). Now these companies must quickly cut costs or hope they get more time to repay. [Read]

Spain phases out “golden visa” program: In recent years, European countries have rethought these programs, which offer residency to wealthy foreigners who buy up real estate, balancing investment with housing affordability for locals. [Read]

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DIGIT OF THE DAY

Two-thirds of Small Businesses Are Anticipating an Increase in Revenue This Year

Inflation might be digging in its heels, GDP growth could be taking a breather, and jobs data could be underwhelming — but one thing you can bet on is the unwavering confidence of entrepreneurs and business leaders in themselves. According to the 2024 Bank of America Business Owner Report, 65% of small and 87% of mid-sized business owners see their revenues climbing in the upcoming year, providing a glimmer of hope for the US economy.

• Over the next 12 months, 80% of mid-sized businesses (annual sales of $5M-$50M) plan to expand — while 69% aim to hire more staff.

• Meanwhile, small businesses (annual sales of $100K-$5M) remain more reserved, with 39% planning expansion and 30% expecting to hire.

Small business, big concerns: No matter how bullish, small businesses are facing more challenges than usual — 70% of owners report making personal and professional sacrifices, such as working longer hours, reducing their own salaries, and cutting marketing budgets. Access to affordable credit is also a significant issue, leading some to rely on personal credit cards and loans. Despite these hurdles, the resilience of small businesses has helped steer America’s economy away from a recession. Nonetheless, as economic conditions become more challenging, smaller firms may face even tougher times ahead.