# Was I Wrong About Covered Calls?

Source: https://www.youtube.com/watch?v=xzDFbv_JSks
Recap page: https://rapidrecap.app/video/xzDFbv_JSks
Generated: 2025-10-05T12:31:36.703+00:00

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## Quick Overview

Covered call funds underperform their underlying equity benchmarks over the long term, primarily because they cap upside returns while maintaining downside risk exposure, which is exacerbated by the high implied costs demonstrated through withdrawal analysis and comparison to enhanced covered call funds.

**Key Points:**
- Over a 10-year period ending August 2025, the Global X S&P 500 Covered Call ETF (QYCC.TO) trailed the iShares Core S&P 500 Index ETF (XUS.TO) by an annualized return of 3.15 percentage points (12.43% vs 15.58%).
- The BMO Covered Call Canadian Banks Fund Series ETF (ZWB.TO) underperformed its comparable BMO Equal Weight Banks ETF (ZEB.TO) by 2.96 percentage points annually over 10 years.
- Withdrawal analysis shows that covered call strategies limit upside participation when the underlying asset price rises above the strike price plus premium collected, meaning investors miss out on significant gains.
- The implied cost of these products is substantial, requiring an additional breakeven fee ranging from 1.45% to 2.68% annually just to match the ending wealth of the underlying equity portfolio over 10 years.
- Enhanced covered call funds, which use leverage, have outperformed both standard covered call funds and their underlying equity counterparts in recent short-term periods, suggesting that leverage in this strategy can boost returns without significantly increasing downside risk in those specific periods.
- The speaker argues that covered call funds do not generate true passive income, as the income derived from selling options is offset by capped upside returns and retained downside risk, making the strategy detrimental for long-term investors.
- The speaker, Ben Felix (CIO of PWL Capital), discloses that his firm manages portfolios that do not use covered call ETFs, indicating a potential conflict of interest regarding his critical stance.

![Screenshot at 0:41: The main conclusion screen clearly states the video's thesis: "PASSIVE INCOME FROM COVERED CALLS IS FINANCIAL BULLSH\*T".](https://ss.rapidrecap.app/screens/xzDFbv_JSks/00-00-41.png)

**Context:** The video addresses the common claim that covered call funds provide reliable, passive income while maintaining performance comparable to simply holding the underlying stocks. The speaker, Ben Felix, Chief Investment Officer at PWL Capital, analyzes historical performance data, withdrawal simulations, and compares standard covered call funds against enhanced (leveraged) versions and their underlying equity benchmarks to test the validity of these claims, particularly for long-term investors.

## Detailed Analysis

The presenter argues that covered call funds are generally detrimental for long-term investors because they cap upside potential while retaining downside risk, leading to underperformance compared to simply holding the underlying equity index. Using 10-year data ending August 2025, the Global X S&P 500 Covered Call ETF trailed the iShares Core S&P 500 ETF by 3.15 percentage points annually (12.43% vs 15.58%). A withdrawal analysis confirmed this underperformance, showing that investors using covered calls miss out on significant upside when the market rallies past the strike price plus premium. Furthermore, the breakeven analysis revealed that investors would need to pay an extra annual fee ranging from 1.45% to 2.68% just to match the ending wealth of the underlying equity portfolio, highlighting the substantial cost drag of the strategy. The speaker notes that enhanced (leveraged) covered call funds have recently outperformed both standard covered call funds and their underlying equities, suggesting that leverage can amplify returns in certain market environments, but standard covered calls inherently cap upside. The core problem identified is that the income derived from selling options is often insufficient to offset the lost capital appreciation, especially for long-term investors who rely on capital growth. The speaker concludes that financial advisors should be wary of promoting these products due to inherent conflicts of interest and the potential for misleading marketing that focuses only on high distribution yields.

### Covered Call Background

- Covered call options involve selling someone the right to buy your stock at a set price (strike price) for a premium; the seller's upside is capped at the strike price plus premium, while downside risk remains.

### Performance Comparisons (10 Years Ending Aug 2025)

- Global X S&P 500 Covered Call ETF underperformed its benchmark by 3.15% annualized; BMO Covered Call Canadian Banks ETF underperformed its index by 2.86% annualized.

### Withdrawal Analysis

- Simulations assuming withdrawals equal to the covered call yield showed that the covered call portfolio ended with significantly less wealth than the underlying equity portfolio in four out of five tested pairings.

### Breakeven Fee to Match Ending Wealth

- To match the underlying equity's ending wealth, a breakeven fee of 1.45% to 2.68% would need to be paid by the covered call funds, illustrating the drag created by the strategy.

### Enhanced Covered Calls vs. Standard

- Enhanced (leveraged) covered call funds outperformed standard covered call funds and their underlying indices in recent shorter-term periods, demonstrating that leverage amplifies outcomes in both directions.

### Reasons to Dislike Cover Calls

- They do not generate true passive income (income is offset by capped returns), create unnecessary layers of risk/cost, and harm long-term total returns by capping upside.

### Expert Financial Advice Context

- True financial advice requires knowledge of base rates, technical planning competence, and understanding of human psychology to prevent biases like mental accounting regarding income vs. capital.

![Screenshot at 0:05: The video initially shows a split screen featuring the speaker and a historical panel discussion at a baseball stadium.](https://ss.rapidrecap.app/screens/xzDFbv_JSks/00-00-05.png)
![Screenshot at 0:41: A title card appears declaring the video's central argument: "PASSIVE INCOME FROM COVERED CALLS IS FINANCIAL BULLSH\*T".](https://ss.rapidrecap.app/screens/xzDFbv_JSks/00-00-41.png)
![Screenshot at 1:40: The first performance chart displays the underperformance of the Global X S&P 500 Covered Call ETF \(green line\) compared to the iShares Core S&P 500 ETF \(yellow dashed line\) over time, illustrating capped upside.](https://ss.rapidrecap.app/screens/xzDFbv_JSks/00-01-40.png)
![Screenshot at 2:22: The covered call payoff diagram shows the profit capped at $7 \(green line\) once the stock price exceeds $107, while the long stock position \(yellow dashed line\) continues to gain indefinitely.](https://ss.rapidrecap.app/screens/xzDFbv_JSks/00-02-22.png)
![Screenshot at 3:54: A slide summarizing the main reasons to dislike covered calls: they are not good investments, do not generate passive income, and create unnecessary layers of risk and cost.](https://ss.rapidrecap.app/screens/xzDFbv_JSks/00-03-54.png)
![Screenshot at 4:24: A screen highlights the high yield advertised for covered call funds: "10% YIELD!".](https://ss.rapidrecap.app/screens/xzDFbv_JSks/00-04-24.png)
![Screenshot at 6:05: A graphic comparing two wallets, A \(underlying equity\) and B \(covered call\), where B shows income from dividends and selling shares, illustrating the strategy's components.](https://ss.rapidrecap.app/screens/xzDFbv_JSks/00-06-05.png)
![Screenshot at 6:34: A graphic illustrates the mental accounting bias, separating 'INCOME CAPITAL' from the rest of the brain, suggesting investors mistakenly prioritize the perceived income stream.](https://ss.rapidrecap.app/screens/xzDFbv_JSks/00-06-34.png)
![Screenshot at 7:18: A bar chart titled "Breakeven Fee to Match Ending Wealth of Covered Call Fund" shows that covered call funds require an explicit annual fee \(breakeven fee\) of 1.45% to 2.68% to match the performance of the underlying equity.](https://ss.rapidrecap.app/screens/xzDFbv_JSks/00-07-18.png)
![Screenshot at 10:48: A table summarizing the 10-year performance differences shows the average covered call fund underperformed its underlying equity by -3.25% annually.](https://ss.rapidrecap.app/screens/xzDFbv_JSks/00-10-48.png)