Covered Call ETFs vs. Fixed Income (Bonds) | Is Fixed Income OBSOLETE for Income Investors?

The speaker argues that fixed income assets like bonds have historically underperformed equities, particularly the S&P 500, over the long term. They advocate for covered call ETFs as a superior alternative for income investors, as they offer the potential for higher returns and tax advantages compared to fixed income. The speaker concludes that, in their opinion, the traditional 60/40 stock-bond portfolio allocation is outdated and unnecessary for long-term income investors.

Poor Fixed Income Returns

• 00:01:24 Historically, fixed income has exhibited poor long-term performance compared to equities, as shown in presentations by various fund managers and over the last 180 years. Data suggests that the S&P 500 has significantly outperformed various fixed income asset classes, including government bonds, corporate bonds, and preferred shares. The speaker believes that fixed income has consistently underperformed and will likely continue to do so.

Covered Call ETFs

• 00:07:29 Covered call ETFs offer a way to generate income from equity investments, transforming growth-oriented assets into income-producing assets. The speaker believes covered call strategies can generate income from a variety of assets, including the S&P 500, NASDAQ 100, or individual stocks. This strategy provides the benefit of income generation without the need to sell shares, making it suitable for long-term investors.

Tax Efficiency

• 00:08:45 Fixed income investments are less tax-efficient than covered call ETFs, especially in taxable accounts. The income from fixed income is typically taxed as regular income, which is less favorable than capital gains taxes applied to the premiums from covered call ETFs. The speaker contends that covered call ETF premiums are taxed at a rate that is 50% more advantageous than traditional fixed income.

Volatility

• 00:09:40 The speaker dismisses the argument that fixed income offers lower volatility as a reason to invest. They believe that, for long-term investors, volatility is irrelevant as they are focused on overall long-term returns. Volatility is not considered a major concern for long-term buy-and-hold investors because they do not need to sell shares due to receiving income through covered call strategies.

60/40 Portfolio

• 00:10:27 The speaker criticizes the traditional 60/40 stock-bond portfolio allocation as an outdated trend that doesn't make sense for long-term income investors. They believe that it's unnecessary to allocate a portion of a portfolio to underperforming fixed income when 100% allocation to equities can offer better long-term returns. In their view, this approach provides a more advantageous outcome for income investors due to the potential of higher returns from equities.