Covered call ETFs, like the JPMorgan Premium Equity Income ETF, offer retirees monthly income but can decline significantly in net asset value. In 2022, these funds dropped 20% to 30% while still distributing income. For example, a retiree with $500,000 in such a fund lost $120,000 in principal despite receiving $36,000 in distributions, resulting in an overall loss of $84,000. Understanding the difference between yield and total return is crucial for retirees relying on these funds for income.
"During the 2022 bear market, covered call ETFs declined 20% to 30% in net asset value even as they continued paying their monthly distributions. The income kept coming, but account values kept falling."
"A fund yielding 8% that declines 15% in NAV over the same period has a total return of approximately negative 7%. The challenge is that while the income is real, the loss is also real."
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