Canadian Covered Call ETF Hub

00 · The whole picture

The key number from each question, side by side: what it pays, whether that pay was earned, what it cost against simply owning the holdings, and how hard it can fall. Step into a question tab for the full detail and the chart.

Covered call ETFs earn their income mostly by selling call options against the stocks they hold. A call option is the right to buy a stock at an agreed price, and what that right sells for depends mainly on how volatile the stock is. The wilder the stock, the better the chance it jumps a lot, so its options sell for more, the fund collects more option income, and the yield on the fund is higher. The catch is that same volatility. Higher-yielding covered call funds usually hold wilder stocks, and the fund's unit price swings with them. So the first question: is the yield in line with the volatility you are taking on? The graph below shows each covered call ETF as one dot: the volatility of the holdings inside the fund against the cash yield it paid over the last 12 months. The line is the average cash yield at each level of volatility. Green dots pay more cash than other ETFs with comparable volatility.

Covered call ETFs can pay very high distributions. Some pay as they go, passing along whatever cash the strategy generated. Others hold their payout steady regardless of what the period brought in. A steady payout is easy to like, but it raises a question: is the cash actually earned, or is it your own money coming back to you? Paying you with your own money cannot go on forever. To answer it, we compare the cash a fund paid out over the period we can measure, three years where it has that much history, one year otherwise, against the return the fund generated over the same window: the cash paid plus the change in its unit price. When the cash paid out exceeds the return the fund generated, we count the difference as your own money coming back. The graph below covers all funds with a full measurement window. The green column is the funds that made every dollar they paid: none of your money came back. The coral columns spread out the rest by how many dollars of every $100 invested came back as your own money, with the median marked.

Selling call options trades away uncertain upside for certain income. A call option obliges the fund to hand over gains when the underlying rises above the agreed price. That trade costs little in stocks that barely move or drift sideways: with no run to give up, the premium is close to pure extra income. But when stocks turn from bearish to bullish, the fund can miss much of the gain, because that upside was already sold in advance. Over the medium to long term this can leave a covered call ETF's return lagging simply holding the stocks outright. The chart below splits the funds with a measured benchmark into funds with no leverage and leveraged funds, and counts how many came out ahead of simply owning their stocks over the past 12 months, cash included, and how many fell short. A leveraged fund is measured against its underlying at the same leverage, after borrowing at Canadian prime plus 1.75 points. Where no plain fund exists, the benchmark is a plain basket of the fund's current holdings, estimated; when we can check the estimate against a real plain fund, it lands within about 2 points.

The premium income may look tempting, but the risk of the stocks underneath these funds does not go away. When the underlying falls, a covered call ETF falls with it. When the underlying recovers, the fund recovers more slowly, because the sold calls hand part of the recovery to the option buyer. That is what you accept for the yield: most of the fall, part of the rise. We measure risk three ways: the deepest fall in the fund's last three years, how much of the underlying's up and down weeks the fund captured, and how long it took to climb back from that fall, counting the distributions paid along the way. The graph below turns the middle one into dollars. Take a week where a fund's holdings move $10. The solid bars show what the typical fund did with that move: how much of the $10 rise it kept in the up weeks, and how much of the $10 fall it took in the down weeks. The faint bar behind each is the holdings' own $10 move. Keeping less of the rise than you take of the fall is the trade in one picture.

You have seen our four criteria: the highest yields, the own-money payers, the return tradeoff, and the risk. Now weight the four questions by what matters to you. Choose the weight you assign to each criterion below.