4 Things to Know Before Investing in Covered Call Funds

Before you invest in that covered call fund that's magically returning 12% a year, need to know these four things. I'm Tyler. I'm a former financial advisor and portfolio manager. Now I make financial content for free so that you don't have to pay for it.

1. How Covered Call Funds Generate Income

Covered call funds generate income by selling calls on the stocks they hold. The premiums they collect add to the fund's yield.

2. Performance During Market Volatility

The funds will do better when market volatility is high because the premiums will be high.

3. Performance During Low Volatility

The funds will do worse when market volatility is low or there's high stock price movement, as the underlying assets will then get called, preventing you from participating in any upswing.

4. NAV Erosion Risk

Finally, some of these funds distribute more than they earn in premiums to market that sexy return—this is called NAV erosion risk, or net asset value, and it's real. If the fund yields 12% a year, but the assets only appreciated 5%, then 7% is eating into the capital and total return.

Conclusion

If you're looking for just income, this type of fund can be a solid compliment. But remember, these funds aren't going to beat the market on an annual basis for the reasons I just mentioned. If any of this is helpful, tune into my new podcast, Money Guide on the Side, by clicking the link in my bio.

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