The One Scenario Where Covered Call Funds Might Make Sense

There are a myriad of reasons to avoid covered call and income funds and many of these reasons are covered in detail here in "The High Yield Scam: Wall Street's Hottest Grift" and "Options Pricing: The Futility of Beating the Quants". However, there is one niche scenario where these funds might make sense for an investor seeking income. In this short reading, we will cover this scenario and some alternatives to consider for those in this unique scenario. None of this is financial advice. Consult with a professional such as Nathan Winklepleck,CFA before making any financial decisions.

Many investors seek income in the stock market in hopes of replacing their jobs fully or partially supplementing their income to cover expenses. This is a great goal to have and it is completely possible with index, dividend/value, or factor investing in a globally diversified portfolio. Covered calls and high-yield funds are not the fast way to do this and will likely underperform just selling shares (creating a synthetic/manufactured dividend) of their benchmarks or indexes. Despite the underperformance, high expense ratios, potentially higher tax bills, and other challenges with these funds. There is one specific scenario that might make sense to own these funds if there is no other option.

This scenario is if the investor needs to prove income. Such as if you needed to prove income to a bank for a mortgage, car loan, and other loans or if you rent somewhere. Investors who are in this niche situation with a small portfolio without a job or are unable to work may need to use these high-yielding funds for income proof. Unfortunately trading gains, selling shares, and that $50 dividend from KO can't help you in this scenario. If you have a 5-6 figure portfolio and you lose your job this can be a potential temporary option that doesn't involve draining the portfolio to $0 or selling shares to live in an expensive motel room because you can't prove income until you get back on your feet. This scenario is very niche because there are better alternatives to handle this unfortunate scenario. If no other alternatives exist for you, then covered call/income funds might make sense. If you do have to use these funds then put in the bare minimum required to survive and put the rest in quality dividend, value, or factor ETFs and businesses in a globally diversified portfolio.

Some alternatives you can do if you're in the above scenario: stay with family/friends until you get a steady job, live in your car temporarily, work online, go to a temp agency, take any retail/restaurant/warehouse job, work for Uber/DoorDash(if you can't get other work), or a margin loan(only if you know your situation is very short term and don't use over 25-30%. See "Margin Mastery: How The Rich Get Richer" for more about margin). Any of these alternatives would be preferable over switching to income funds. It is far better to be humble, save, and swallow your pride now over letting your hard-earned life savings slowly disappear from covered call and income funds. No one wants to live in their car, with their parents, or work a McJob but it's far better to do it now than being forced to work at a McJob when you are 85 because you have nothing left in savings. Making sure to be as frugal as possible, consolidating debt, and not using credit cards are top priorities when living in survival/savings mode as well.

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