Why High-Income Covered Call ETF’s Are NOT as Sexy as they look?

When you’re on the path to financial freedom, anything that promises high income tends to sparkle like gold dust.

So when I started getting more and more questions from Wealth Builder Club members about High Income Covered Call ETFs, I knew it was time to take a closer look. 

I’ve been testing some of these myself, and as always, I’m here to cut through the noise and help you make wise, aligned decisions with your money.

👉 Watch this video for the full breakdown of what I found, juicy pros, sneaky downsides, and when (if ever) they deserve a spot in your portfolio.

Let’s start with the basics…

🍰 What Is a High Income Covered Call ETF?

At its core, a Covered Call ETF is a fund that holds a bundle of shares and sells call options on those shares to generate income. These “option premiums” are then passed on to investors as distributions. 

The result? 

Often higher yields than your standard equity ETFs.

But as always, there’s no free lunch. That income comes with trade-offs, particularly in how much growth you might be giving up.

✅ The Juicy Pros

1. High & Regular Income
   These ETFs are designed to produce steady, often elevated yields, thanks to the income generated by selling options. Some even reach double-digit returns, especially appealing in low-interest environments or when you're ready to start feasting off your assets.
2. Income Stability in Choppy Markets
   Because you’re collecting income regardless of price movement (to a point), covered call ETFs can smooth out volatility and offer a buffer in flat or downward-trending markets.
3. Low-Effort Access to Complex Strategies
   These funds let you tap into the power of option-based income strategies without needing to know how to trade options yourself. No spreadsheets, no stress.
4. Extra Diversification
   You’re not just investing in the stock market anymore; you’re layering on an income-generating options strategy too.

⚠️ The Cons You Must Understand

1. Capped Growth Potential
   Here’s the biggie: if the market rises fast, your gains are capped. The fund might have to sell shares at a predetermined price, and you miss out on the ride. Not ideal if you’re still in growth mode.
2. Underperformance Over Time
   These ETFs often lag behind simple index trackers over the long term because of that growth cap. They’re income engines, not rocket ships.
3. Higher Fees & Complexity
   More active management means higher costs. You’re paying for that strategy, which may or may not be worth it depending on your goals.
4. Tax Traps
   The income generated from covered calls is usually taxed as ordinary income, not at the lower qualified dividend rate. So if you’re holding them in a taxable account, you might lose a hefty chunk to taxes.

🎯 When (and If) You Should Use Them

Covered call ETFs are not a must-have for everyone. But they can be a very useful tool for:

• Investors close to or at their financial freedom number
• Those wanting regular income from a portion of their portfolio
• People managing drawdown in retirement or semi-retirement
• Anyone looking for smoother returns in sideways markets
  
  

⚠️ They are not ideal during your accumulation phase, when your focus should be on growth and compounding, not capping your upside.

If you do use them, aim to hold them in tax-advantaged accounts like a retirement annuity, superannuation, or pension structure to protect those yields from tax erosion.

🧭 Final Thoughts

High Income Covered Call ETFs can absolutely have a place in a smart portfolio,  but only when they match your season of life, your income needs, and your bigger wealth plan.

Use them strategically, not emotionally. And remember:

Fancy doesn’t mean effective. 

A simple index tracker, used consistently and tax-efficiently, will beat most bells and whistles over the long haul.

With clarity and courage,
Ann x