5 Mistakes to Avoid When Investing in Covered Call ETFs

Wiki Article

Covered call ETFs can be a great way to earn regular income from your investments, but like with anything, there are a few common mistakes that can trip people up. If you’re just getting started or thinking about adding these to your portfolio, here are five things to avoid. For a helpful list of ideas, you can check out https://dividendstacker.com/high-yield-covered-call-etfs.

1. Only Looking at Yield
It’s easy to be attracted to the high income some of these ETFs promise, but don’t let yield be your only focus. A very high yield can sometimes be a red flag. It might mean the fund is taking on more risk than you’re comfortable with. It’s important to look at the whole picture—how the ETF is managed, what stocks are in it, and how it has performed over time.

2. Ignoring the Tax Side
Covered call ETFs often throw off quite a bit of income, but not all of it qualifies for lower tax rates. Some of it may be taxed at your regular income rate, depending on how the income is generated. That means your after-tax returns could be lower than you think. It’s worth taking a moment to understand what type of income you’re actually getting.

3. Expecting Big Growth
These ETFs are usually built to provide income, not strong price increases. So if your goal is long-term growth, putting too much of your money into covered call ETFs might not get you there. They can be a useful part of a balanced portfolio, but don’t count on them for big gains.

4. Not Knowing the Strategy
Some investors jump into covered call ETFs without really knowing how they work. In short, the fund sells options to make money, but that can limit how much the ETF grows if the market goes up fast. If you don’t understand the basics of options, it’s a good idea to read up a bit first.

5. Chasing Performance
It might be tempting to buy the ETF that did the best last year, but past performance doesn’t mean it’ll happen again. Try to focus on what fits your goals instead of what did well recently.

By avoiding these common mistakes, you can make better choices and use covered call ETFs wisely as part of your investing strategy.