Tax implications may reduce after-tax returns for covered call ETFs

Matthew Smart, chief investment officer at WWM Investments in Chicago, warned that the after-tax net total return of covered call ETFs might fall below investor expectations. These funds generate income by holding equities and selling call options or using related derivatives to earn income yields. However, the tax implications of realizing option premiums or short-term gains can be costly for investors.

Covered call ETFs are popular for generating monthly cash flow, but investors must look beyond favorable yield metrics to understand the tax consequences. The tax hit can be significant, especially since investors often do not review tax implications until receiving a 1099-DIV.