Call Writing Funds Are Dead!

Earlier in the week, the morning email from ETF.com had a quick blurb about the JP Morgan Equity Premium Income ETF (JEPI). JEPI is a covered call fund, it has a lot of AUM and had a pretty good year in 2022, only dropping 3.53% including dividends versus a decline of 18% for market cap weighted S&P 500. 

This year it is pretty much flat while MCW S&P 500 is up a lot. ETF.com noted that JEPI is seeing outflows all of a sudden. This looks like performance chasing and then bailing when the performance falters. It is extremely unlikely that covered call funds will fully participate when the stock market is up a lot. Just like momentum funds will probably go down more when the market falls, all strategies and factors will have might have points in the stock market cycle where they could be expected to outperform and periods that they could be expected to under perform. We had the same conversation about dividend funds last month. Like covered call funds, dividend funds did well in 2022 and are lagging this year.

We all know the warnings about past performance. Covered call funds and dividend funds doing well last year and lagging this are probably a good example of what they have in mind with that boilerplate warning. Last year's great fund might do relatively poorly this year or maybe next year. 

Let's take this idea up a level though. I think past performance is very relevant. We've been talking for years about funds setting expectation.This is a point we've explored many times before. What expectation does a fund or the fund managers set and do they deliver on that expectation?

I've long owned the AGFiQ US Market Neutral Anti-Beta ETF (BTAL). The expectation set by that fund is that it won't look like the stock market most of the time. What I care about is if it meets that expectation. In looking at covered call funds I would expect it to be less volatile than the broad market and would evaluate based on that metric. Something like a tech or consumer discretionary fund (and true with most individual stocks in those sectors) is whether they go up more than the broad market during uptrends. This year the ETFs I have for clients are each up far ahead of the S&P 500, I would expect that to be the case. Last year, they each lagged the S&P 500 which makes perfect sense. 

Note, I don't think I am cherry picking there, I've owned those two sector ETFs for clients since George W Bush was President. Going forward, I expect those sectors to outperform in the good times and lag during the bad. I will get my defense elsewhere. Keeping it consistent, something I own for defense, like BTAL, should lag in an up market and hopefully will go up in a down market. 

This is all a pretty good microcosm for what it means to understand what you own.  

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.