Madison Launches Covered Call ETF Just as Recession Fears Mount

Madison Investments, a Wisconsin-based newcomer to the ETF market, launched its covered call exchange-traded fund that will compete with JPMorgan Chase & Co.’s popular JEPI and JEPQ funds in offering investors a hedge against market downturns.  

The actively managed Madison Covered Call ETF (CVRD) will generally hold a concentrated portfolio of 30-60 stocks on which it sells in-the-money call options. This new fund comes on the heels of Madison’s first ETF, an active dividend stock fund called the Madison Dividend Value ETF (DIVL), which launched Aug. 15.  

Madison’s covered call fund aims to provide income for investors by supplementing traditional income holdings such as bonds, while also hedging against market downturns. The firm seeks to differentiate CVRD from its bigger competitors—including the JPMorgan Equity Premium Income ETF (JEPI)—by emphasizing active management and transparency.  

CVRD sells individual call options on each of its stock holdings, compared with JEPI’s use of comparatively opaque derivatives, and has a much more concentrated portfolio composed in part of dividend-paying equities securities. It currently holds just over 30 stocks compared to JEPI’s 139.  

Covered Call ETFs 

“There’s been a lot more interest in our covered call strategies in the past two years,” CVRD portfolio manager Ray Di Bernardo said in an interview. “When the market is going up, people don’t want to hedge, but when you have an event like [the market downturn] in 2022, people are reminded you have to manage your risk.”

Di Bernardo also manages Madison’s covered call mutual fund and closed-end fund, which are similar to CVRD and have traded for nearly 20 years. Madison has traditionally been an asset manager for separately managed accounts and mutual funds, and has more than $20 billion in assets. It launched its ETFs in response to increasing demand from financial advisors.  

While covered call funds often underperform in major market rallies, they are designed to outperform in market downturns. Madison’s covered call mutual fund ended 2022 with 4% positive returns, compared with the S&P 500’s 18% decline. 

Despite relatively strong employment numbers, Di Bernardo predicts the U.S. economy will enter a recession soon, driven by a slowdown in consumer spending. 

The fund’s expense ratio is 0.90%, higher than both the 0.80% average for the ETF type and JEPI’s 0.35%. 

Contact Gabe Alpert at [email protected]