In the recent weeks, the markets have been volatile, emphasizing the importance of owning low-volatility, high-income investments such as closed-end funds (CEFs) that sell call options on their portfolios. These funds provide exposure to stocks with less volatility and higher income. Covered-call funds, like those offered by Rex Shares, operate by holding all S&P 500 stocks but receiving cash payments from investors who would like to buy shares in the future at fixed prices. This strategy decreases volatility and increases income, with yields of 7% or higher being common.
One example of a covered-call fund is the Rex FANG & Innovation Equity Premium Income ETF (FEPI), which offers an impressive yield of 25.2%. However, FEPI’s portfolio is concentrated in tech stocks, posing a diversification risk. To mitigate this risk, investors should consider a more diversified portfolio of CEFs, including those that focus on corporate and municipal bonds, equity funds, and real estate investment trusts (REITs). Diversification helps reduce the impact of market downturns on the overall portfolio.
While FEPI has seen more selling pressure recently due to its concentrated holding in tech stocks, it still provides some protection against downturns compared to investing in individual tech stocks. Investors should be cautious when investing in high-yield funds like FEPI, as their main objective is not long-term buy-and-hold strategies. Instead, these funds are more suitable for investors seeking high income in a short period.
A better option for managing downturn risk and increasing income is the Nuveen S&P 500 Dynamic Overwrite Fund (SPXX), which also sells call options on its portfolio like FEPI but for the entire S&P 500. SPXX offers a yield of 7.3%, which is significantly higher than the S&P 500’s average yield. The fund’s lower volatility and higher diversification make it less likely to fall as far as tech-focused funds like FEPI in a fearful market. However, diversification comes at a cost, and SPXX may yield less than more concentrated funds.
SPXX has outperformed FEPI in terms of total performance, as it provides more stable returns and higher income. The covered-call strategy of SPXX helps reduce drawdowns in rising markets, providing investors with some protection against market downturns. Additionally, SPXX allows investors to benefit from market recoveries while still receiving secure dividends and some exposure to the market’s fluctuations. Overall, CEFs that sell call options on their portfolios can be a reliable option for investors seeking high income and lower volatility in the current market environment.
