No news headlines today… Because it's Saturday, and we're going to explain covered calls.

A lot of you might own JEPI. Some might be curious about JEPQ or QQQI. And based on our own experience, most people understand the yield part but not the trade-off part. So let's fix that.

This is not financial advice. Always do your own research. Past performance doesn’t guarantee future results.

Imagine you own a house worth $300,000. You don't think the price is going anywhere crazy this month.

Someone says: "I'll pay you $5,000 right now for the right to buy your house at $320,000 anytime in the next 30 days."

You take the deal. If the house stays under $320,000, you keep the house and the $5,000. If it rockets to $350,000, you still have to sell at $320,000. You made money, but you left $30,000 on the table. That's the trade-off.

That's a covered call. Replace "house" with "100 shares of stock" and the mechanics are identical. You own a stock, you sell someone the right to buy it at a set price, and you collect a premium. If the stock stays flat or goes up a little, you win. If it rips past your strike price, your gains are capped.

Most of you aren't selling covered calls yourself. You're buying ETFs that do it at scale. Here are the big three:

We're not going to lie. For people who want actual monthly income from their portfolio right now, these are some of the best tools available. JEPI alone can pay out over $2,800 a year on a $35,000 investment, deposited monthly like clockwork (if everything goes right, which we’ll explain below). QQQI could pay as much as $4,900 for the same investment.

If you're retired, supplementing a fixed income, or building a cash flow stream you can live on, these ETFs do something that index funds and growth stocks simply don't: they pay you consistently, every single month, without you having to sell a single share. And it’s at a much higher rate than simple treasuries or savings accounts can get you. In a sideways or choppy market, they're genuinely hard to beat.

And yes, the yields go up as you move down the list. But so does the trade-off ⬇

Net Asset Value (NAV) erosion. When a fund pays out more than it earns, the share price shrinks over time. At 14%, QQQI especially is pushing the limits of what an equity fund can sustainably distribute. You might be collecting big monthly checks while your principal slowly declines. If the asset keeps rising past the strike price, you’re not getting richer. You're getting your own money back in pieces.

Capped upside. JEPI returned about 10.5% last year. The S&P returned 20%. That 10-point gap isn't a bug. It's the strategy working as designed. During rallies like the one we just had (Nasdaq up 12 days straight), these funds structurally can't keep up. But they aren’t supposed to! because this is a fixed-income strategy that can be especially effective when markets are trading sideways.

Taxes. Most covered-call ETF income is taxed as ordinary income (up to 37%), not qualified dividends (capped at 20%). That 14% yield could be closer to 9% after taxes depending on your bracket. QQQI gets a partial break through Section 1256 index options (60/40 tax split), but it's still worse than dividends from something like SCHD.

In summary: if you think the market is going to go up, you probably do not want to buy covered call ETFs. They are a great tool for sideways markets, but you can get wrecked if you aren’t careful.

Good fit: you're retired or near retirement and need monthly income now, you're holding them in a tax-advantaged account (IRA/Roth), or you think the market is going sideways and you want to get paid while you wait.

Bad fit: you're in your 30s or 40s chasing yield you don't need yet, you're holding them in a taxable account without understanding the tax drag, or you picked QQQI because "14%" looked good on a YouTube thumbnail.

We think covered-call ETFs are real tools. But they're income tools, not growth tools. The best use is as one piece of a bigger portfolio (paired with VTI, SCHD, or QQQ for growth), not the whole thing.

That's our take at least, and that’s today’s edition. See you Monday.

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Cheers,
Brandon & Blake of Invested Inc