Transcription
Of course, this is not financial advice and for entertainment purposes only. Investors, welcome a very special guest, Mr. Joseph Hogue from Let's Talk Money.
Now, in this video, we're going to be talking about everything about the illusion and just in general of cover call ETFs. So, first off, Joseph, how are you feeling about being on the channel and just about this craze of cover call ETFs and just cover calls being the thing this year in the market?
>> Great to be here, Marcus. Thanks. Thanks for having me. And yeah, it has been a really just an amazing transition here from uh from dividend stocks, dividend ETFs, and now into some of these covered call ETFs, the single stock ETFs. I think I saw a report the other day that uh the I mean ETF inflows, fund flows have just broken records year after year. But this year there have been more new single stock and those covered call ETFs than anything else. Uh you know, tens of billions of dollars going into these. And I think while they uh investors can get dollar signs in their eyes and looking at some of these higher yields 80 120% yield dividends on some of these uh they can be uh they can be a little dangerous and I don't think investors really understand the risks in these.
Now once again investors this is not financial advice and for entertainment purposes only. Do your own research. But the first question for you, Joseph, is what's driving the demand for cover call ETFs and super high income products versus traditional dividend ETFs or dividend stocks and then even like lower yielding bonds that some people might look at a 2% 3% 4% dividend yields and they throw that out of the out of the window and look at these super high income products with uh way higher yields.
>> Sure. Well, I mean, who can resist, you know, those those yields of of even some of the lower ones on a JPI, the JPQ of of 10 and 12%, but then you've got these 20 40% and even higher income uh income yield. So, who can resist that high of a yield? But I think a lot of it is, you know, a lot of these pay out monthly, some of them even pay out weekly. So, it speaks to that dividend or that paycheck replacement idea that much better than some of these quarter quarterly ETFs. you know, your bills don't get paid every 3 months. So, why should your dividends? So, a lot of people are uh attracted to that. I think also though it's a it's a convenient option selling strategy all packaged in an ETF. So, there's none of none of these that you can't do yourself. Okay? You can buy the stock, you can sell covered calls against it, maybe even save a little bit of money on that expense ratio in the ETF, but it is so much easier just to have an ETF do it yourself. they're going to that portfolio manager. This is what he does. He tracks that stock and he sells those covered calls on there. He rolls it over. So, it's it's much easier and a little bit more tax efficient at times as well.
Now, from your analyst perspective, what do you think are the pros and cons of cover call ETFs?
>> Sure. Well, again, you've got that that constant uh that constant dividend stream. It's not necessarily consistent. So, I think you you really do need to make the distinction between constant and consistent. You might get a dividend every week or every month, but that dividend is going to fluctuate, especially especially on a lot of these higher ones. Okay? So, it's very important to understand what these ETFs are buying. So, the underlying or the stock or the basket of stocks that they're buying as well as that strategy they're using. So, a covered call, they are selling call options against these stocks. Now, those call premiums that they collect on those, those fluctuate up and down with just the market volatility as well as the ups and downs in these stocks, you know. So more market volatility, more crazy roller coaster ride on stocks, those premiums go up, that income goes up and uh and these your portfolio manager or these ETFs, they collect more money. So that's important to understand. That's what's happening and why these these uh this income or those dividends are going up and down. That's uh you know that's that's one of the the cons there is that you never quite know where your dividend is going to be even though it will still probably be fairly high. Again, the pros here, it's done for you. It's a a nice ETF package. It is uh obviously very attractive, some of those higher yields and is right for a certain type of investor. I think you really need to understand yourself as an investor and what these do and whether it's right for you. And some of these covered calls, some of these ETFs are right for some investors and others are right for for others. you know, some uh see much higher income, but the share price goes down so much that it does destroy some of that dividend yield. There's others that uh do a much better job of protecting that share price, protecting your your capital, so to speak, and uh and still pay out really good uh good dividends. So something like the JAPI or the JPQ have done a very good job, you know, maybe not paying you quite so much in income in those dividends, but they do keep those share prices higher and so you don't quite lose quite as much of your of your underlying capital there. Uh, one thing you can do if you want to check on these is of course just look at the stock price, look at the price chart on the stock and see where that's gone over the past. But also you can go into the historical data tab on Yahoo Finance or really any any investing site uh and you can see the dividends. If you go into historical d tab there change for dividends only you can see the dividends over time how those have risen and fallen or you can go to uh just the stock price and see how that's risen or fallen adjusted for those dividends. So very important to understand where the dividends have gone and where the price has gone.
Is there a sort of dividend yield that you kind of want to look for as a income investor? Maybe not yourself, but like if you put your mind in like an income investor's shoes, what kind of yield should they be looking for? And what is the yield that is more of a red flag and something that investors should be keeping caution of?
>> Sure. Yeah. You know, that's a great question because I think again if we take it back to different yields for different investors, different strategies for different investors, then we can go investor by investor and say, "Okay, you know, this is what you want to be looking for for the long-term buy and hold investor. The investor that just doesn't want to worry about their stocks, is fine with just a stable uh a stable growing dividend, you're probably going to be looking closer to the range of three to maybe 6% even, maybe even as high as 8%. you get some of those stocks like Altria, like Philip Moore, so that do pay the higher dividend and are fairly stable. Those that's really going to be the best you're going to do as far as dividend yield. And I know everybody wants to reach for for higher yield and get more, but if you just look at, you know, their return on capital for the company, if um most companies are getting are leveraging their sales growth into maybe a uh 12% earnings growth, of course, they're not going to be able to provide a 15 or 20% dividend uh off of that off of that stock forever. It's just it's destructive of the uh you know, of the company and of the business. So, you know, long-term dividend investors, three to six or 8%. Uh, if you want a little bit higher income, you are able to you you're not worried quite as much about the price or your investment in the stock. You don't want it to go down, but you you don't need it need it to go up quite as much. You just need that income, but you need that income to be safe and stable. Maybe a little bit older investors, then yeah, you're looking at right around the range of maybe 10 to 15%. I feel like like that's more stable and uh it can be more consistent, you know, and again, you've got names like the JPI, the JPQ, which do provide uh those covered call strategies that can provide that a little bit safer and consistent consistent dividends without destroying your your investment value. Now, on the other side, if you are okay with the risk, if you're u maybe a little bit younger investor that uh that hasn't lost all his hair yet and hasn't seen it grow uh go gone gray yet, then um you can take that risk and you just want the highest income possible. You want to see those dividend checks come in, then yeah, you can reach for some of those 20 30 40% dividend yields. Understand you're going to see the stock price come down. You're going to see that investment come down. So what's really important in those is that you have a replacement uh percentage of that dividend. So you receive that dividend every week, every month, you take a portion of that and you put it back in the stock. Okay? Because a lot of that is actually, you know, return of capital. Okay? They are actually giving your money back on that stock rather than just a return a dividend return on on your investment. So you want to take that return of capital, put it back in the stock if you're not going to spend it. that's going to help you uh keep your investment stable and keep growing those dividends in the future.
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In terms of nav erosion, we're seeing these cover call products have negative returns on the share price. So you could go on like Google, even like Yahoo Finance and just see the ticker and then the share price is negative. But if you go on like stockanalysis.com, seeking alpha and you filter for the total return, so the dividends or the distributions plus the um share price appreciation or in this case it would be depreciation, the returns are actually positive. So my question to you is is nav erosion like something that is a huge red flag and should investors be really thinking about nav erosion when they're investing in these cover products?
>> It's I would say it's it's maybe a red flag but definitely not a dealbreaker for a stock. Again, you have to understand what that uh stock is doing, what that company or ETF is doing. Uh and really it's kind of built in. It's doing what it's supposed to be doing. Okay, with those higher yields, you're going to get some uh some NAV erosion or destruction, right? So, I like that idea of going to some of these sites and looking for the total return. You can do that on Yahoo Finance. If you go to the historical data tab, you go look at the adjusted price column. So, that price is going to be adjusted for dividends. So, if you uh do five years, you go back, you look at what that adjusted price was five years ago, what it is now, that's going to show you, you know, the percent return, the total return over those five years. And what we see in some of these is just over the last year. So we've got, you know, outliers just high-f flyers like the uh MSTY, right? The uh Micro Strategy tracking high high income ETF there by YieldMax actually is about a 9 and a half or 10% total return, right? So it is positive. It has produced a 10% total return on your money as well as you know, not as well as but including that very high dividend yield. So again, right in ETFs for right for the the right type of investor. You know, some some people out there just want that income. They don't want to lose money. So those types uh people in the MSTY would be up 10% over the past year, but would have gotten that income through mostly income. Uh something like the ulty, right? The yield max ultra ultra high income uh has actually up 25% total return over the last year price plus the uh plus the dividend.
In terms of diversifications and even investing in these cover car products, do you prefer for investors to look at maybe products that are single stock exposure? So like a MSY where the underlying is basically investing in MSTR or do you think that investors should look into stocks or ETFs in this case that have an index based approach like an ulti but traditionally it would be like the NASDAQ 100 or the SNP 500 like your Jeep, Jebq, Drupal Qi, SPYI etc. So do you prefer indexbased cover call ETFs or single stock based cover call ETFs?
>> Sure. Well, I gotta tell you those single stock ETFs scare the hell out of me really. Uh and maybe it's just because I'm old, right? But uh I mean, man, there they they build so much leverage into these sometimes. The MSTY, if you consider Bitcoin as or uh the MSTR, so the strategy stock as a leveraged bet on Bitcoin, the MSTY is a leveraged bet on leveraged bet. So, you can get very high levels of uh of leverage. And of course, it's it's totally appropriate for someone that has a very bullish outlook on Bitcoin. Okay, if you think Bitcoin is going to continue to go up, MSTR is going to go up and MSTY is going to really go up. So, it can be right for for a right type of investor. For myself, a lot of these just have not been tested. Okay, they have not been most of these not around since even 2020, but none of them have been around since the 2008 financial crisis. So, none of them have been really tested on uh you know that stress in liquidity uh of a of of a stock. Okay, these single stock ETFs, they have to uh be able to buy those swaps to keep that exposure to the uh to the stock, right? So, what happens when there just aren't any buyers for or any sellers or buyers? No, if any sellers or buyers for that stock, that liquidity just disappears. So, they can have some real problems and that and I don't think they've seen we've seen those tested. uh and you know when we eventually do see some kind of a market market crash or market volatility then those will be tested and there could be some some heavy losses on those. So I would and at that point when it's a single stock ETF the the argument to just do it yourself becomes much stronger right you own the stock you own those those covered calls you you sold those covered calls against it it comes becomes much easier just to do it yourself so I do and I do like the the more diversified ones like the ulty better uh obviously the the QQQ right would be the covered call ETF against the the QQQ and then of course the JAPY and the JAPQ just because they're they're much more diversified they have been tested they have been around. Um you're not going to see that kind of destruction when uh you know when the market does come down. Now I do I would warn people that uh just because it does own a basket of stocks like the ulty doesn't necessarily mean it's it's diversified. A lot of those stocks in that uh in that ETF are very much focused on Bitcoin, very much focused on some of the the high-flying tech stocks. In fact, that fund is put together just by looking at exclusively at volatility. What stocks are the most volatile? what stocks is that portfolio manager going to get the highest premiums in. So um you know if that market volatility returns then they are going to see a lot of those stocks come down together. So it's not necessarily the diversification and the safety you might think or you might get in something like a QYLD a QDTE even or a the Jeppy or the JAPQ
In terms of dividend frequency. So the traditional approach is quarterly dividend payments. Whether it's a dividend stock, dividend ETF or just regular ETF that has a dividend. Now for these cover call products, it was monthly and then we have weekly and now Defiance has an ETF that pays you twice a week. And word on the street is that they might be the first ETF issuer to do daily income payments from cover call products. So my question to you is, is a dividend frequency something that is important for an income investor in your mind as an analyst?
No, I I I mean I'll rephrase that of course. Uh and I think we're we're going to get to a daily one with tokenization of assets uh stocks going on chain with that. We will get to a daily dividend uh and many daily dividend funds, I'm sure. Um but as you see as you see the complexity of these ETFs increase trying to use these swaps and the derivatives and the options to uh replicate the stock plus get that dividend more frequently you know that more comp that that complexity with that going up the expenses go up the risks go up and a lot of times you know we just you don't understand the risks until and it works until it doesn't so I I think unless it is very targeted to one of your goals, then you can buy you can get a monthly ETF, a monthly dividend ETF. Buy four of them, you know, not not the same one, but buy four different monthly ETFs. Look back and when because typically ETFs even and stocks pay in the same the same week, the same quarter each year, right? Or the same it's the same week of the same month. So you can actually strategize your ETFs or your dividend stocks to pay you weekly or to pay you monthly or you know on the specific dates you need. So you know again you go to Yahoo Finance, go to the historical data tab, show dividends only or pretty much any of these stock investing sites. You can see the exact dates of when these companies have paid out their dividends or when the ETFs have paid out their dividends. So you can actually uh you know kind of plan for when you're going to get those dividends around when your house payment is due, when your car payment is due, and and really plan it around your goals, fine-tune it for that rather than just uh just relying on one ETF to pay you every single day or every single week.
Does it scare you when people are thinking about going allin on cover call ETFs? Now, we know there's different yields, there's different risks to each ETF, but when someone, let's say somebody were to go to you and say, "Hey, I want to go all in these cover call products." Is that does that scare you? Does that make you feel a little bit concerned about them? Or is it more of like, "Hey, like if that fits your goals and strategies, then go for it."
I get teeyed. I get reminiscent nostalgic because that's exactly where I was, you know, 20 years. Well, in fact, like I started in 1999, which was a great time to start investing. Let me tell you, you lose all your money the next year. uh started in 1999, lost all my money the next year, lost all my money again in 2006 because I'm stupid like that and I don't learn or 2008. Uh and finally learned in 2010. So, believe me, I've made all those mistakes. Uh probably learned more from my mistakes as I ever did as an analyst. Um so, I understand I understand the uh the draw and the attractiveness of 30 40 100% um you know, dividend yield for if I could double my money every year, right? Um, but you know, it's speaking from experience. It will come back and bite you. Okay? You never want all of your money in one stock, in one sector, in one theme. Uh, for these covered call, for these high yield ETFs, I would say no more than even even 20% of your money. And that's probably on the very high side only for those investors that really need, you know, that income or really like that approach. Maybe 20% at the most. Have other themes, have other stocks. And really what you want to do is go to a stock chart, any stock chart that you can overlay the different stock prices, the different stocks and and ETFs and see how they've reacted together. Um, you know, to see, okay, if I buy these two ETFs, what am I get am I getting anything that's a little diversified, okay? Because you'll see a lot of these ETFs uh are pretty much tracking each other uh along with the market, right? So, it doesn't do you much good as far as diversification, as far as fit safety to buy three or even four or five ETFs that are pretty much all going to crash at the same time. All right? So, you look at those stock charts, see where these stocks have followed each other and uh and maybe look for something else. you know, maybe maybe look for some safer dividend stocks, maybe a little bit lower yield, maybe looks look for some other sectors uh in the consumer goods, maybe real estate stocks, things like that that haven't performed maybe haven't performed quite as well, but also haven't followed these other uh these ETFs quite uh quite one for one. So, you got a little bit more diversification there, a little bit more safety for when for when the end comes.
Do you think that coverall ETFs are more for beginner level investors, experienced level investors, or maybe somebody who is younger or older?
Okay. Well, first I I think um maybe not necessarily for beginner investors and uh that's not trying to be like elitist or anything, but I do really think you need to understand how these ETFs work and the strategy behind them. So, you know, for these covered call ETFs, first you need to know, you know, how an ETF works. Then you need to know how options work. Then you need to know how a covered call ETF works. Okay? So you need to know um you need to to know how the strategy works. Have a outlook on the underlying. Okay? So you need to know okay what are these what's this ETF investing in? Whether it's tech stocks, whether it's uh Bitcoin uh treasury stocks, whether it's uh you know high high beta volatility stocks. Okay, what's my outlook on those? Then you have to know okay what are they doing with that? How are they holding those stocks? What is what's the strategy? So the call options that they're selling against that understand that. So that is a lot to understand. All right? And I feel like for a lot of beginner investors, don't try to complicate investing. Okay? I know it complicating investing. That's our job here on YouTube, right? We have to sound smart. We have to always have new ideas and new stocks to to to talk about. That's our job, right? Uh but that is not investing. Okay? Investing is about your goals where you need your money to be. understand that there is some you need to take what we say as far as stocks and say okay is this right for me where am I at in my investing journey my investing experience and uh is this very complex covered call swap strategy you know leverage on top of Bitcoin leverage right for what I need right now okay? So that's the uh that's the on the experience side as far as for the age side um I mean I'd say it really doesn't matter how old you are I myself. I'm I'm getting up to where that age where old people are, but I'm not old. So, I don't know how I quite feel about that. Um, but it doesn't matter if, you know, if if I'm old or young. It's where I'm at in that investing journey, where my experiences and what I understand because you really you just need to understand how these work.
Now, last question for you is, what do you think will win a lower yielding traditional dividend ETF? maybe like a two to 5% dividend yield. We got something like SED, FD VV, DGRO, VIG, kind of those traditional high quality dividend ETFs in my opinion or those ones like right now with uh three, two, four times the yield. I'm not going to even compare the ones that have like 30 more times the yield, but let's go with like a 3% dividend yield with dividend growth. So that's the that's the key is dividends usually might grow year-over-year which is great because you want dividend growth in my opinion for an investor who wants income. So do you think that that will win versus the income products that are cargo calls where the income is pretty flat for since inception. So you're not having dividend growth maybe even just limited dividend growth. So what do you think will win long term? lower yielding with a dividend growth or higher yielding with little to no dividend growth.
The the copout is it beca it depends on where what type of investor you are. What type do you want that that higher income yield? Are you ready to be stressed out a little bit uh to be able to get it or do you want to a set it and forget it low stress kind of dividend growth approach. Okay. For myself, I kind of like to to straddle the fence. Um, you know, and and hope it doesn't kind of hit hope it doesn't hurt. But, uh, with maybe the JPI, the JPQ, uh, because it does have, um, you know, that stability in dividend, it's a little bit higher yield. So, I still get a little bit higher yield. Uh, but it it's not going to destroy my my my investment, right? That that price isn't going down. But, of course, this is always this is always in a retirement account, right? So, I'm not paying taxes on those dividends. very important for for dividend investors. For someone that wants that set it and forget it approach, then then yeah, that uh you 3 to 6% dividend growth uh is going to is going to win out. I I think those are the the long-term companies uh that you'll never have to worry about or if you're in a fund, you'll never have to worry about because there are so many companies in the fund than um something like the dividend aristocrats fund, right? Uh there's stocks that have paid dividends for 25 plus years. And sure, year-over-year, some of those might might drop out and some might be added, but over time, it's going to be very high quality high quality names. Okay? For the investors that that want the higher income, that are ready for that stress, I say I say go for it. But again, understand what they're doing, have an outlook, have a positive outlook on what they're doing, you know, the underlying stock or the underlying crypto or whatever they're investing in. and uh and cap it at maybe 10 15% 20% at most of your portfolio.
Now, if you guys want to see his YouTube channel, it will be in the link in the description of this video and in the pinned comment section. Once again, thank you so much, Joseph. And if you guys like this video, please give a like and I will see you guys in the next one. Thank you so much for watching and once again, this is not financial advice. Do your own research. Investing is risky once again. And check out our last video on your screen. I love you guys so much. Crush on the stock market and take it easy.