# Covered Calls: What People (Still) Get Wrong Source: https://www.youtube.com/watch?v=K3sYY3T7V8k Recap page: https://rapidrecap.app/video/K3sYY3T7V8k Generated: 2025-10-26T12:32:35.905+00:00 --- ## Quick Overview Covered calls are generally destructive to long-term wealth accumulation because they cap upside potential, even when investors seek immediate income, leading to lower total returns compared to simply holding the underlying assets, as demonstrated by comparisons showing covered call ETFs underperforming index funds across various market conditions. **Key Points:** - Covered calls cap upside potential, meaning investors sacrifice potential large gains for immediate income, which is detrimental to long-term wealth. - Data comparing a covered call strategy (like JEPI) to a broad market index (like IVV) over time shows the covered call strategy significantly underperforms in total returns (e.g., JEPI 48% vs. S&P 500 72.9% annualized return since May 2022 in one example). - The underlying equity exposure in actively managed covered call funds (like Hamilton's HHIS) often underperforms the relevant index (like the S&P/TSX 60) due to the combination of covered calls and leverage. - The argument that covered calls protect against drawdowns is partially true (offering a slight buffer), but the lost upside participation during market recoveries outweighs this protection over the long run. - The entire financial product landscape, including actively managed funds that sell covered calls, is often driven by perceived investor demand for income rather than actual optimal investment outcomes, leading to products that are structurally disadvantaged for long-term growth. - The speaker expresses personal responsibility for continuing to address comments and complex topics like covered calls to clarify misconceptions fueled by marketing hype. ![Screenshot at 03:38: The title card explicitly states the video's main thesis: "WHY COVERED CALLS ARE DESTRUCTIVE TO LONG-TERM WEALTH".](https://ss.rapidrecap.app/screens/K3sYY3T7V8k/00-03-38.png) **Context:** The video addresses common misconceptions surrounding covered call strategies, particularly in the context of popular income-focused ETFs, following up on previous videos arguing that covered calls are a 'devil's bargain' that harms long-term wealth. The speaker, Ben Felix, Chief Investment Officer at PWL Capital, reviews audience comments and presents comparative data, including a simulation of a covered call strategy versus a simple index fund holding, to illustrate the long-term cost of sacrificing upside for income. ## Detailed Analysis The speaker directly addresses audience feedback concerning his stance that covered calls are destructive to long-term wealth, even when income is needed. He references his previous videos and data showing that covered call strategies consistently underperform a simple buy-and-hold strategy on the underlying equity over time, citing a 10-year comparison where a covered call strategy yielded 48% annualized return versus 72.9% for the underlying index (03:54). He counters arguments that covered calls mitigate drawdowns by pointing out that the lost upside participation during market recoveries significantly outweighs the minor downside protection, leading to a greater wealth gap over time (07:19). When addressing specific Canadian covered call ETFs like HHIS, he notes that its 25% cash leverage further complicates performance relative to un-leveraged, non-call strategies (12:25). Furthermore, he refutes claims that his analysis cherry-picks poor performers by showing that newer, popular covered call ETFs like JEPI and HHIS also underperform their respective benchmarks (Nasdaq 100 and S&P/TSX 60) over their respective short lifespans (09:52, 11:03). The core issue, according to the speaker, is that the market rewards products that cater to the psychological desire for income (like the 12% yield jar) over products that maximize actual wealth accumulation (like the 4% yield jar), leading to structural disadvantages for covered call funds in the long run. ### Addressing Covered Call Objections - The commenter @max_gagliardi incorrectly assumes the speaker is trying to time the market; the core argument is that covered calls structurally limit upside, which is true even if they mitigate some downside (03:42). ### Canadian Covered Call ETF (HHIS) Comparison - HHIS, a Canadian covered call ETF with 25% cash leverage, underperformed its benchmark (S&P/TSX 60) since inception (Feb 2022) despite the leverage, showing the strategy's inherent limitation (11:32). ### US Covered Call ETF (JEPI) vs. Index Fund (IVV) Simulation - A simulation showed that for $1M invested, the covered call strategy (JEPI) resulted in $1,188,153, while the index fund (IVV) resulted in $1,475,097 over the same period, demonstrating significant wealth loss from capped upside (07:11). ### Addressing Cherry-Picking Allegations (JEPI vs. QQQY) - The speaker compares JEPI (Nasdaq covered call) to QQQY (Nasdaq 100 covered call) and shows both underperform the Nasdaq 100 index fund (QQQ) over their short lives (10:03). ### Fundamental Flaw of Covered Calls - The strategy changes the distribution of expected returns, capping upside participation, which is fundamentally detrimental for long-term investors seeking growth, regardless of the income generated (14:43). ### Final Conclusion on Active Management - The speaker notes that the vast majority of active managers, including those running covered call funds, underperform passive index funds in the long run (14:24). ![Screenshot at 00:03: Thumbnails of previous videos showing the argument that covered calls are destructive to wealth.](https://ss.rapidrecap.app/screens/K3sYY3T7V8k/00-00-03.png) ![Screenshot at 00:07: Text overlay citing The Globe and Mail about the rush of new Canadian ETFs targeting income investors.](https://ss.rapidrecap.app/screens/K3sYY3T7V8k/00-00-07.png) ![Screenshot at 00:37: Title slide explicitly stating the video's focus: "WHY COVERED CALLS ARE DESTRUCTIVE TO LONG-TERM WEALTH".](https://ss.rapidrecap.app/screens/K3sYY3T7V8k/00-00-37.png) ![Screenshot at 01:34: Quote from the book "Fixed" by John Campbell and Tarun Ramadorai about capitalism responding to perceived demand over actual demand, leading to products with hidden costs.](https://ss.rapidrecap.app/screens/K3sYY3T7V8k/00-01-34.png) ![Screenshot at 02:24: Visual metaphor showing the brain \(knowledge\) valuing income from covered calls \(money icon\) over the individual's long-term wealth \(person icon\).](https://ss.rapidrecap.app/screens/K3sYY3T7V8k/00-02-24.png) ![Screenshot at 03:44: Chart comparing the performance of a covered call ETF \(green line\) versus an underlying index \(blue line\) over 10 years, showing significant underperformance by the covered call strategy.](https://ss.rapidrecap.app/screens/K3sYY3T7V8k/00-03-44.png) ![Screenshot at 04:52: Chart illustrating the wealth gap between the two strategies during a market downturn \(2020 COVID crash\) and subsequent recovery, where the covered call strategy lags significantly.](https://ss.rapidrecap.app/screens/K3sYY3T7V8k/00-04-52.png) ![Screenshot at 07:22: Comparison chart illustrating that holding constant spending leads to the covered call investor \(28,000 JEPI shares\) having significantly less wealth \($1,103,972\) than the index investor \(2,925 IVV shares\) \($1,161,880\) by September 2022.](https://ss.rapidrecap.app/screens/K3sYY3T7V8k/00-07-22.png) ![Screenshot at 08:09: Chart comparing a portfolio holding cash plus underlying equities versus covered calls, showing the covered call strategy \(green\) trailing the pure equity/cash strategy \(blue\) over 10 years.](https://ss.rapidrecap.app/screens/K3sYY3T7V8k/00-08-09.png) ![Screenshot at 09:30: Display of an academic paper abstract titled "Why inexperienced investors do not learn: They do not know their past portfolio performance," supporting the idea that investors misjudge their own history, which is relevant to why people trust income-focused products despite poor long-term results.](https://ss.rapidrecap.app/screens/K3sYY3T7V8k/00-09-30.png)