What is NAV erosion?
In one line: NAV erosion is the slow fall in an income fund's share value when its payouts plus the rallies it sold away take out more than the market gives back.
How it works
A fund's NAV is what one share is worth: everything it owns, divided by its shares. NAV erosion is that number sliding down over the years, even while the payouts keep arriving.
In a Covered-call ETF, two things cause it:
- The fund keeps the falls. When the market drops, the stocks drop. The premium cushions only a little.
- The fund sells away the bounces. When the market climbs back, the calls hand most of the climb to the buyer.
So the price steps down and doesn't step back up. The payout is paid out, so it doesn't refill the fund. Funds that sell At the money feel this most. For how the funds are built, see how covered call ETFs work.
An example (hypothetical)
An illustration, not a trade idea, with made-up round numbers. You buy 100 shares of a fund at $20, so $2,000 in. It sells calls at the money and pays out all the premium.
| Index | Fund share | Payout | You, so far | |
|---|---|---|---|---|
| Month 1: index falls 10% | −10% | $18.00 | $40 | −$200 + $40 = −$160 |
| Month 2: index climbs back | back to start | $18.00 (rise sold) | $36 | −$200 + $76 = −$124 |
| Months 3–4: same fall, same climb back | back to start | $16.20 | about $68 more | −$380 + $144 = −$236 |
The index ended where it began, twice. Your shares fell from $2,000 to $1,620. The payouts were about $144. You're down $236 in a market that went nowhere.
That's NAV erosion. The payout looked steady. The share price paid for it.
Why it matters for sellers
The payout rate on a quote screen counts the cash, not the slide. A fund can pay out every month while your share value shrinks. Some of that payout may even be reported as Return of capital, partly your own money coming back.
So judge an income fund by its Total return: price change plus payouts, next to the plain index, over a full up-and-down cycle.
Selling your own Covered call, you can avoid the worst of it. After a drop, you choose a strike above your cost, or skip the month. That's a choice the fund doesn't make, and it's at the heart of the wheel strategy. The month-by-month version is in why QYLD's price keeps falling.
Questions
Does every covered call ETF have NAV erosion?
Not always, and not equally. Funds that sell at the money on a jumpy index tend to slide most. Funds that sell further up keep more of each rally, so their price has more room to hold.
Can NAV erosion reverse?
The price can rise in a steady, rising market. But in markets that fall and bounce, an at-the-money fund keeps almost none of each bounce, so lost ground is hard to win back.
How do I spot NAV erosion?
Compare the fund's share price today with its price a few years ago, then compare its total return with the plain index over the same years.
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