Covered call ETFs promise monthly income. Boomers heard "monthly income" and stopped listening. The tax part comes later. It always does.
These funds sell call options on stocks they own. They collect premiums. They send those premiums to shareholders who think they've beaten the system. The IRS classifies most of these distributions as ordinary income. That means you pay your full marginal rate. Not the nice capital gains rate. Not the qualified dividend rate. The rate reserved for people who work for a living, which is f*cking hilarious considering the whole point of buying these ETFs was to stop working.
A generation that spent four decades contributing to tax-deferred accounts just discovered that monthly income sounds great until April. They wanted dividends. They got a 1099 that requires a CPA and three glasses of wine to process.
The funds work exactly as designed. They sell upside. They collect pennies. They distribute those pennies as ordinary income taxed at rates up to 37%. Meanwhile the S&P just goes up anyway, which means you paid taxes to underperform.
Financial advisors sold these products by saying "monthly income" over and over until it sounded like financial planning. It's not planning. It's a tax bill with extra steps.
Someone on CNBC called this "income engineering." That's what we're calling it now. Engineering. As if collecting option premiums in a taxable account is the financial equivalent of building a bridge. The bridge collapses every January when the tax forms arrive, but sure, let's call it engineering.
Boomers wanted yield in a zero-rate environment. They got yield. They also got a letter from their accountant explaining why their effective tax rate went up 8% despite being retired. Turns out the promise of monthly income and the reality of monthly income are separated by about four tax brackets and a Schedule D you can't decode without help.
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