The Risks of High-Yield Covered Call ETFs—and How to Manage Them

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If you're looking for a way to earn extra income from your investments, you may have come across high-yield covered call ETFs. These funds can be attractive because they pay out high dividends, often monthly, by selling options called “calls” on the stocks they hold. It sounds like a simple way to boost your income, and in many ways, it is. But like anything that sounds good, it’s important to know the full picture.

High-yield covered call ETFs aren’t without their risks. If you’re thinking of adding them to your portfolio, it’s a good idea to understand what you’re getting into. You can check out a helpful breakdown here: https://dividendstacker.com/high-yield-covered-call-etfs.

One of the biggest risks is missing out on stock price gains. Since these ETFs sell calls, they give someone else the right to buy the stock at a certain price. If the stock shoots up in value, the ETF might have to sell it, and you could miss out on those higher returns. Basically, you're trading off long-term growth for short-term income.

Another thing to think about is that option income isn’t guaranteed. If the stock market is slow or moving sideways, the amount of call income might drop. And while the dividends look high, the value of the actual ETF shares can go down, especially in a weak market. So even if you’re getting paid monthly, your total investment might still lose value.

So how can you handle these risks? One way is by not putting all your money into covered call ETFs. Use them as just one part of your investment plan. This way, you can balance income with growth from other types of investments. Also, make sure you understand what the fund holds. Some are more aggressive, while others are more conservative.

Finally, pay attention to taxes. The income from these ETFs can be taxed differently than regular dividends, depending on how the fund earns its money. If taxes matter in your situation, it might be worth talking to a tax expert.

High-yield covered call ETFs can be helpful tools, especially if you like steady income. But like any investment, they come with trade-offs. By knowing how they work and being smart about how you use them, you can enjoy the benefits while keeping risks under control.