What are Covered Call ETFs?

Covered Call ETFs are exchange-traded funds that employ a strategy known as writing covered call options. These funds generate income by selling call options on underlying securities held in their portfolio.

How do Covered Call ETFs work?

Covered Call ETFs typically hold a diversified portfolio of stocks or other assets. The fund manager sells call options with strike prices above the current market prices of the securities in the portfolio. If the option is exercised, the fund sells the securities at the strike price. If the option expires worthless, the fund keeps the premium received for selling the option.

What are the benefits of investing in Covered Call ETFs?

Investing in Covered Call ETFs can provide investors with regular income through the premiums received from selling call options. These ETFs also offer potential downside protection in falling markets and can be a way to enhance overall portfolio returns.

How do I choose the right Covered Call ETF for my investment portfolio?

When choosing a Covered Call ETF, investors should consider factors such as the fund’s expense ratio, underlying assets, historical performance, and the fund manager’s strategy. It is also important to understand the risks associated with writing covered call options.

Are Covered Call ETFs suitable for all investors?

Covered Call ETFs may be suitable for investors seeking income and those comfortable with the risks associated with options trading. However, it is important for investors to assess their risk tolerance, investment goals, and consult with a financial advisor before investing in Covered Call ETFs.

Top 9 Covered Call ETFs Canada

Here are 9 of the best covered call ETFs for Canadian investors:

1. Global X NASDAQ 100 Covered Call ETF (QYLD)

QYLD, or the Global X NASDAQ 100 Covered Call ETF, sells call options on the underlying stocks that it holds.

QYLD has a unique monthly cash flow and its low expense ratio ensures investors get the most bang for their buck.

As an ETF, QYLD offers liquidity and flexibility – investors can buy or sell shares during the day at market prices.

2. Horizons Enhanced Income Equity ETF (HEX)

The Horizons Enhanced Income Equity ETF (HEX) offers investors the chance to earn income by writing covered call options on Canadian and US equities.

The ETF provides a high level of monthly distributions from option premium income and dividends, and it has a unique approach.

It seeks higher yield using strategies like index replication, index sampling and synthetic replication to maximize yield and efficiency.

3. First Trust TCW Opportunistic Fixed Income ETF (FIXD)

The First Trust TCW Opportunistic Fixed Income ETF (FIXD) concentrates on fixed income securities, giving investors a unique chance to diversify their portfolio and reduce risk.

The fund seeks to benefit from market inefficiencies through actively managing a wide range of fixed income securities.

This active management lets fund managers adjust their holdings based on market conditions, possibly maximizing returns for investors.

An unusual feature of the FIXD ETF is its exposure to many sectors in the fixed income market.

It invests in a variety of securities, such as corporate bonds, government bonds, mortgage-backed securities, and asset-backed securities.

This diversification helps to spread risk across different sectors, giving investors a more balanced and resilient portfolio.

Furthermore, the FIXD ETF offers competitive expense ratios compared to other similar products in the market.

4. iShares Russell 2000 ETF (IWM)

The iShares Russell 2000 ETF (IWM) offers Canadian investors a way to gain exposure to the US small-cap market.

It tracks the Russell 2000 index which has approximately 2000 stocks.

An advantage of this ETF is that it provides access to smaller companies that have the potential for greater growth.

So, if these companies continue to expand and gain market share, investors can benefit from their success.

5. BMO Covered Call Dow Jones Industrial Average Hedged to CAD ETF (ZWA)

The BMO Covered Call ETF (ZWA) focuses on the Dow Jones Industrial Average.

ZWA employs a covered call strategy to generate income, while still allowing investors to participate in potential market gains.

This ETF is CAD headged, offering protection against changes in the value of the Canadian dollar compared to the U.S. dollar.

What sets it apart from other covered call ETFs is its emphasis on the Dow Jones Industrial Average.

6. Invesco S&P 500 BuyWrite ETF (PBP)

Invesco S&P 500 BuyWrite ETF (PBP) invests in a collection of stocks from the S&P 500 index and writes options on those stocks.

By writing options, the fund produces extra income through the premiums earned from selling these options.

The extra cash can help counterbalance any potential losses in the underlying stock portfolio during market downturns.

PBP looks to offer investors both capital value and income opportunities.

7. CI First Asset CanBanc Income Class ETF (CIC)

The CI First Asset CanBanc Income Class ETF (CIC) is focused on Canadian banking stocks.

Its portfolio is spread across different sectors in the banking industry.

By selling call options on securities in the portfolio, the fund seeks to earn additional income that increases total returns.

8. Global X S&P 500 Covered Call ETF (HSPX)

The Global X S&P 500 Covered Call ETF (HSPX) provides exposure to the S&P 500 index.

By selling covered call options, HSPX attempts to increase returns and manage downside risks by gathering premiums from the sale of these options.

It also has a monthly distribution policy.

This can be advantageous for those needing regular cash flow or wanting to supplement their current income streams.

Plus, with HSPX, diversification is possible.

Investing in it gives access to a wide range of industries and sectors within the US equity market.

9. BMO Covered Call Canadian Banks ETF (ZWB)

The BMO Covered Call Canadian Banks ETF (ZWB) strives to generate income by selling covered call options on Canadian bank stocks.

Investors who pick this ETF can reap the potential upside of the Canadian banking sector, plus they can get extra income from the selling of call options.

In addition to giving exposure to the Canadian banking sector, this ETF also provides downside protection.

Selling call options limits possible gains, but can also help guard against losses by providing some cushioning if share prices drop.

What is a Covered Call ETF?

Covered Call ETFs offer a unique combination of stock ownership and options trading. They allow investors to make money by selling call options on stocks they already own.

Investing in this type of ETF means buying shares of a portfolio of stocks and simultaneously selling call options.

This gives buyers the right to purchase underlying stocks at a predetermined price within a specific time frame.

The strategy is to generate income from the premiums received from selling the call options.

This can help investors increase returns in sideways or slightly bullish markets.

When choosing a Covered Call ETF, consider those with a diversified portfolio of high-quality stocks, as this helps reduce risk while still generating income.

Also, look for ETFs that have a successful track record of generating income through covered calls.

Check historical performance and ensure the fund’s strategy fits your investment goals.

Overall, Covered Call ETFs provide an opportunity to earn money while still participating in stock market gains.

Be sure to evaluate each fund’s holdings and strategy before investing.

Key Considerations When Investing in Covered Call ETFs

Investing in covered call ETFs requires careful consideration.

It’s essential to understand the underlying assets and their performance.

Evaluate the level of risk you’re comfortable with.

Writing call options can limit potential gains, but provide protection.

Analyze the fund’s historical performance.

Consider its expense ratio and management fees.

Know the rules and guidelines that govern each ETF.

Lastly, diversify investments across different sectors or asset classes for risk reduction.

ETF letters in wooden blocks in front of stock chart

Frequently Asked Questions

What are Covered Call ETFs?
Covered Call ETFs are exchange-traded funds that employ a strategy known as writing covered call options. These funds generate income by selling call options on underlying securities held in their portfolio.
How do Covered Call ETFs work?
Covered Call ETFs typically hold a diversified portfolio of stocks or other assets. The fund manager sells call options with strike prices above the current market prices of the securities in the portfolio. If the option is exercised, the fund sells the securities at the strike price. If the option expires worthless, the fund keeps the premium received for selling the option.
What are the benefits of investing in Covered Call ETFs?
Investing in Covered Call ETFs can provide investors with regular income through the premiums received from selling call options. These ETFs also offer potential downside protection in falling markets and can be a way to enhance overall portfolio returns.
How do I choose the right Covered Call ETF for my investment portfolio?
When choosing a Covered Call ETF, investors should consider factors such as the fund’s expense ratio, underlying assets, historical performance, and the fund manager’s strategy. It is also important to understand the risks associated with writing covered call options.
Are Covered Call ETFs suitable for all investors?
Covered Call ETFs may be suitable for investors seeking income and those comfortable with the risks associated with options trading. However, it is important for investors to assess their risk tolerance, investment goals, and consult with a financial advisor before investing in Covered Call ETFs.

DISCLAIMER: This is not investment advice. Recommendations are for educational purposes only, presented as a path for you to further research. Please seek independent financial advice before making any financial decisions. PiggyBank is not liable for any investment decisions you make based on the information presented on this website.