Covered Call ETFs VS Standard Index Funds/ETFs

This will probably be my only post on this great debate on Blossom...I am making this post because I have gotten a few messages on the CC etf topic and some have asked why I dont focus on CC or own any of those etfs. I want to be clear, I am not bashing anyone with CC etfs, however its just not for me. My profolio dividend yield is only at 1-2% and I am extremely happy with that. My close to 800k Porfolio generates me less then 10k/yr in dividends. However for the past 3yrs my profolio has grown over 100k+ each year. Total return is more important to me right now then having "income". This is my take:

Covered call ETFs get hyped up because they “pay big dividends.” Sounds great, right? But here’s the catch: those distributions aren’t free money, they’re basically you selling off your portfolio’s upside.

Here’s why I think they’re far less superior compared to simply buying a low-cost index fund like the S&P 500 or a Total World Index:

Capped Upside – The second markets rally hard, you’ve already sold away your future gains through the call options. Long-term, that means leaving serious money on the table.

Tax Inefficiency – A lot of those juicy distributions aren’t dividends at all, they’re option premiums. Depending on your account, that can be taxed less favorably than qualified dividends or capital gains.

Marketing Trick – The “high yield” makes it look like free passive income, but in reality it’s just your own growth potential chopped up and handed back to you.

Proven Performance Gap – If you look at long-term backtests, covered call strategies consistently underperform plain index investing because compounding favors uncapped growth.

Market downturn - While the upside is capped, the downside has no protection...so if the market drops you will drop hard with it but when the market recovers youre once again Capped at the limit...thats not good...

If your goal is building long-term wealth, a simple index fund is usually far superior: lower fees, tax-efficient, and you capture the full upside of the market.

Covered call ETFs might make sense for retirees who need cash flow right now and don’t care as much about future growth. But for anyone with a long time horizon? They’re more sizzle than steak.

Here is a quick example

Say you bought Palantir (PLTR) at $20. (not actual price)

If PLTR rallies to $40, your plain stock doubles. Boom you’re up 100%.

But if you owned it through a covered call ETF like PLTY, the ETF likely sold calls at, say, $22 or $23. That means once PLTR rockets past that strike price, you don’t get those extra gains. Instead, you just collect a small option premium (a few percent) and miss out on the stock doubling.

In other words:

Owning PLTR outright: +100% gain.

Owning PLTY: maybe +10–15% plus distributions… but the explosive upside is gone.

That’s the “catch” you trade away long-term growth for short-term income.

Anyways this is just my take on the subject....probably my only post ill make on it too... We are all investors so what works for me might not for everyone, but. I just wanted to explain why I personally don't own any of these CC products.

Happy investing everyone :)

- Will

19K views

73 Comments

Crazy Canuck Investor

@crazycanuckinvestor · 1yr

Will, this is a great post ,you really break down covered calls in a way that clicks.

I actually had a comment the other day on my YouTube channel where someone used a tree analogy to question why I hold covered calls. Their point was: “If you’re reinvesting distributions, isn’t that basically the same as investing in growth?”

I did my best to explain the difference, but I have to admit ,your explanation here is cleaner than mine, lol.

Here’s how I framed it back:
Growth ETFs are like planting an apple tree in your backyard and letting it grow. Each year the trunk thickens, the branches spread, and the harvest gets bigger. If you need cash, you pick some apples, or in a pinch, trim a branch. Some years are leaner, some are bountiful, but the tree itself keeps getting bigger and stronger. Over decades, you’ve got a massive orchard growing out of one trunk.

Covered call ETFs are like taking a saw to that same apple tree every month to guarantee yourself a basket of apples. You always get fruit now, but because you’re constantly cutting, the tree never reaches its full height. The trade-off is steady apples today versus more apples later.

That’s really the choice:
Do you let the tree grow tall for bigger harvests in the future, or keep trimming it back for predictable baskets right now?

If you’re still in the accumulation phase, covered calls will usually drag on growth. The big monthly (or even weekly) payouts look attractive, but under the surface the tree is slowly shrinking. That’s why some say they work better if you’re in a speculative or income-focused phase rather than pure growth.

And honestly, psychology plays a huge role here. Some investors just feel better seeing regular distributions, even if it slows long-term compounding. The key is knowing how it fits into your long-term plan.

For me, my latest portfolio update really showed how powerful compounding can be with less than 10% in covered calls. The growth side is what keeps confirming that the orchard approach works. Covered calls are steady, but they definitely add drag. Took me some research (and a bit of trial and error) to really internalize that.

Thanks again for putting together such a solid post , I think it’ll help a lot of folks frame the trade-off more clearly.

Rez @rezola · 1yr

Not every covered call ETF writes on 100% of their holdings. Some only do like 20% or 50%. The idea is simple: the less they overwrite, the more room there is for upside if the stock or sector runs higher.

If they do 100% overwrite, you’re getting max income from the call premiums, but your growth is basically capped. On the other hand, if they only do, say, 30% overwrite, then most of the portfolio is still free to run with the market. You get some extra income from the options, but you don’t give up all the growth potential.

Some ETFs even switch it up — they’ll adjust the overwrite level depending on how bullish or cautious they are. Kind of like tuning the dial between “income” and “growth.”

Catherine

@ffcatherine · 1yr

Great points! In my opinion every investor should analyze the pro & con of any investment strategy, then adopt whichever strategy works for them in their personal situation. For me I’m happy to have the CC fund managers do the work to get cash into my hands to pay my essential bills being retired without a pension & too young to collect any other type of government paymrny ( CPP etc not for 20 yrs or whatever ) ..

SABA

@sabatew · 1yrEdited

All these CC ETFs post on blossom is making me think I’m missing out. But I know I’m good - sticking with my index funds 👍🏽

See the full comment section 👀Sign up for the full Blossom experience!

Already have an account? Sign in

Join the conversation with 500,000+ other investors 💸

Create an account to get access to everything Blossom has to offer!

📊 Personalized algorithm based on your investing style, experience level and interests
📈 Powerful portfolio and dividend tracking tools
👀 See what top creators and others in the community are investing in