Looking to generate passive monthly income from your investments? Covered call ETFs have become one of the most popular strategies among Canadian self-directed investors β and for good reason.
But between ZWC from BMO, and HDIV and HYLD from Hamilton ETFs, how do you know which one actually fits your investor profile? All three funds share the same basic mechanics, but their strategies, risk levels, and positioning are very different.
In this article, we break down each ETF in depth β without unnecessary jargon β so you can make an informed choice.
π Quick Summary
Short on time? Here is the essential comparison at a glance.
| Criteria | ZWC | HDIV | HYLD |
| Issuer | BMO | Hamilton | Hamilton |
| Market focus | Canada | Canada | United States |
| Leverage | None | ~25% | ~25% |
| Currency hedge | None | None | CAD-hedged |
| Holdings type | Individual stocks | CA sector ETFs | US sector ETFs |
| Options type | OTM | ATM up to ~50% | ATM up to ~50% |
| Risk rating | Medium | Medium-High | Medium-High |
| Distributions | Monthly | Monthly | Monthly |
| RRSP / TFSA eligible | Yes | Yes | Yes |
1. What Is a Covered Call ETF?
Before comparing the three funds, it is essential to understand the mechanics that connect them.
The Covered Call Strategy β Explained Simply
A covered call ETF works in two steps:
- It holds a portfolio of stocks (or other ETFs).
- It sells call options on those holdings to collect additional income called premiums.
These premiums are added to the dividends received, which allows the fund to offer a higher distribution yield than a traditional index ETF.
The Trade-Off to Understand
In exchange for those premiums, the fund gives up part of its upside potential. If markets rally strongly, the covered call ETF will participate less in that upside. That is the core trade-off: income now, in exchange for limited capital growth potential.
These ETFs are designed for investors who prioritize regular income over maximum capital growth.
The Nuance Most Articles Miss: OTM vs ATM
Not all covered call ETFs sell their options the same way. There are two main approaches, and this difference changes everything in terms of yield and growth potential.
Out-of-the-Money Options (OTM)
An option is out-of-the-money when the strike price is set above the current stock price. For example, if a stock is worth $100, the fund sells an option with a $105 strike.
- Premium collected: lower, because the risk for the option buyer is smaller.
- Upside potential retained: the fund benefits from any stock appreciation up to $105 β a potential 5% gain before the option is exercised.
- Result: more modest distribution yield, but greater participation in market upside.
At-the-Money Options (ATM)
An option is at-the-money when the strike price is set at or very near the current stock price. If a stock is worth $100, the fund sells an option with a $100 strike.
- Premium collected: much higher, because the option has an immediate probability of being exercised.
- Upside potential surrendered: almost entirely β as soon as the stock rises, the gain goes to the option buyer, not the fund.
- Result: maximized distribution yield, but capital growth is severely limited.
In short: OTM = less income, more growth potential. ATM = more income, less growth. This strategic choice is at the heart of the differences between ZWC, HDIV, and HYLD.
2. ZWC β The Classic Canadian Income ETF
Issuer: BMO Global Asset Management | Net Assets: $2.15B CAD | Inception: February 2017 | Distribution Yield: 5.82% | MER: 0.72%
ZWC’s Strategy
The BMO Canadian High Dividend Covered Call ETF (ZWC) invests directly in a portfolio of Canadian dividend-paying stocks β think financials, energy, utilities, and telecom. These are among the most reliable, cash-generating businesses in Canada.
The fund then applies a dynamic covered call writing strategy on those positions. The methodology is rules-based and considers dividend growth, dividend yield, payout ratio, and liquidity.
ZWC Uses Primarily OTM (Out-of-the-Money) Options
This is a technical detail that most comparisons overlook, but it is fundamental. ZWC sells its options with a strike price above the current market price (OTM). The direct implications:
- Premiums collected are more modest than with an ATM strategy.
- The fund retains meaningful participation in the upside of its underlying stocks.
- In a bull market, ZWC captures more capital gains than HDIV or HYLD.
- Distribution yield is lower, but the total return profile (income + growth) can be competitive over the long term.
ZWC trades some premium income to keep a foot in the growth story. This is a deliberate choice that differentiates it from Hamilton’s ATM approach.
What Makes ZWC Stand Out
- Full transparency: ZWC holds individual stocks, not intermediate ETFs. You know exactly what you own.
- OTM strategy: ZWC uses out-of-the-money options, preserving some upside potential. In a strongly rising market, it will outperform ATM strategies on capital growth.
- No leverage: Unlike its Hamilton competitors, ZWC uses no financial leverage. The risk profile is more contained.
- Long track record: Launched in 2017, ZWC has navigated multiple market cycles, including the 2020 crash and the 2022-2023 rate hike environment.
- More modest distribution yield: The trade-off of the OTM strategy is a lower yield than HDIV and HYLD β that is the cost of retaining growth potential.
Who Is ZWC For?
- Conservative to moderate investors seeking reliable monthly income
- Investors who prefer to avoid leverage and complex structures
- Those focused on the Canadian market
- Ideal for a TFSA or RRSP focused on passive income
Limitations of ZWC
- Lower distribution yield than HDIV and HYLD
- Capital growth potentially limited in a strongly rising market
- Exclusively Canadian exposure β no geographic diversification
3. HDIV β The Amplified Canadian Income ETF
Issuer: Hamilton ETFs | Net Assets: $1.40B CAD | Inception: July 2021 | Distribution Yield: 10.41% | Management Fee: 0.00% (underlying ETF fees apply)
HDIV’s Strategy
The Hamilton Enhanced Canadian Covered Call ETF (HDIV) takes a radically different approach. Rather than holding individual stocks, HDIV invests in a portfolio of sector-specific covered call ETFs β primarily Hamilton’s own sector funds β covering the major sectors of the Canadian economy.
On top of this, the fund adds modest cash leverage of approximately 25%, obtained through borrowing from a Canadian financial institution (not derivatives). This leverage amplifies both gains and losses.
HDIV Uses ATM Options on Up to 50% of the Portfolio
This is where HDIV fundamentally differs from ZWC on options mechanics. Hamilton’s underlying ETFs sell at-the-money (ATM) options on a portion of the portfolio that can reach 50%. This has important consequences:
- Premiums collected are significantly higher than with OTM options β which is why HDIV’s distribution yield is well above ZWC’s.
- In exchange, upside potential is severely reduced on the ATM portion: when markets rise, the gain goes to the option buyer before the fund benefits.
- In flat or falling markets, HDIV excels: high premiums cushion losses and sustain distributions.
- In a strongly rising market, HDIV will underperform ZWC on capital growth, even accounting for leverage.
HDIV’s ATM strategy is optimized to maximize short-term income. It is the right choice if your priority is monthly cash flow β not capital appreciation.
HDIV’s Sector Composition
HDIV mirrors a sector profile broadly similar to the S&P/TSX 60, with heavy weighting in:
- Financials (34%): banks and insurance companies
- Energy (16%): oil and gas producers
- Gold (15%): gold mining producers
- Utilities (13%): electricity and gas distribution
- Technology (13%): Canadian tech sector
What Makes HDIV Stand Out
- Multi-ETF approach: By holding sector ETFs rather than individual stocks, HDIV achieves instant diversification across multiple covered call strategies simultaneously.
- ATM strategy (up to 50%): The underlying ETFs sell at-the-money options on a large portion of the portfolio. This maximizes premiums β and therefore distributions β at the expense of capital growth potential.
- Moderate leverage: The 25% leverage amplifies the ATM strategy’s effects: more income in stable or falling markets, but limited growth in strongly rising markets.
- No currency hedge: HDIV is fully exposed to the Canadian market in Canadian dollars β no currency risk.
- 0% management fee: HDIV charges no direct management fee, but the underlying ETFs carry their own expenses. Check official documents for the total expense ratio.
Who Is HDIV For?
- Intermediate investors seeking a higher yield than ZWC
- Those comfortable with the concept of moderate leverage
- Investors who want Canadian market exposure with sector diversification
- Good fit for a non-registered account or a TFSA focused on amplified income
Limitations of HDIV
- Leverage amplifies losses in a falling market
- More complex structure (ETF-of-ETFs + leverage)
- Still focused on the Canadian market β limited geographic diversification
4. HYLD β The High-Octane U.S. Income Machine
Issuer: Hamilton ETFs | Net Assets: $1.08B CAD | Inception: February 2022 | Distribution Yield: 13.83% | Management Fee: 0.00% (underlying ETF fees apply)
HYLD’s Strategy
The Hamilton Enhanced U.S. Covered Call ETF (HYLD) is HDIV’s American counterpart. It uses the same architecture β a portfolio of covered call ETFs with ~25% cash leverage β but focused primarily on U.S. equities.
HYLD is CAD-hedged, meaning you get exposure to U.S. equity performance without being exposed to fluctuations in the U.S. dollar.
HYLD: Same ATM Mechanics as HDIV, Applied to U.S. Markets
Like HDIV, HYLD’s underlying ETFs use at-the-money (ATM) options on up to 50% of the portfolio β significantly more aggressive than ZWC. With a technology weighting exceeding 40%, this creates a distinctive profile:
- Option premiums on U.S. tech stocks (Apple, Nvidia, Microsoft) are among the highest in the market due to their elevated implied volatility. The ATM + tech combination generates the largest distributions of the three ETFs.
- In exchange, HYLD surrenders the most upside of the three. During major technology rallies, HYLD captures only a fraction of underlying stock gains.
- The 25% leverage amplifies both effects: more income in calm or falling markets, but an even wider growth gap versus a passive tech ETF in a strong bull market.
HYLD is the ultimate choice for maximizing monthly income β but investors who also want capital growth must understand they are exchanging significant upside potential for high distributions.
HYLD’s Sector Composition
With over 40% in technology, HYLD resembles a tech-heavy S&P 500:
- Information Technology (40.6%): Apple, Microsoft, Nvidia, and peers
- Financials (15.5%): large U.S. banks and financial institutions
- Communication Services (13.7%): Meta, Alphabet, etc.
- Health Care (12.8%): pharmaceuticals and biotech
- Consumer Discretionary (9.8%): Amazon, Tesla, etc.
What Makes HYLD Stand Out
- Diversified U.S. exposure: HYLD gives you access to the world’s largest companies through U.S. sector covered call ETFs.
- ATM strategy (up to 50%): Applied to highly volatile U.S. tech stocks, this strategy generates exceptionally high premiums β at the cost of severely limited capital growth.
- CAD hedge: Currency hedging eliminates FX risk β you are playing U.S. equity performance, not the currency.
- Same leverage as HDIV: Identical ~25% cash leverage mechanics, with the same benefits and risks.
- Highest yield of the three: The combination of ATM options + leverage + high implied volatility from tech stocks generates the largest monthly distributions of the trio.
Who Is HYLD For?
- Investors who want to maximize monthly income
- Those seeking U.S. equity exposure without currency risk
- Investors who understand and accept leverage risk and tech concentration
- A strong complement to ZWC or HDIV for geographic diversification
Limitations of HYLD
- Heavy concentration in U.S. technology β a highly volatile sector
- Leverage amplifies drawdowns, especially during tech corrections
- Complex structure: ETF-of-ETFs + leverage + currency hedge
- Newer than ZWC β less track record across market cycles
5. Strategic Comparison: Which Approach Fits Your Profile?
Strategy Comparison Table
| Strategic Aspect | ZWC | HDIV | HYLD |
| Portfolio structure | Canadian stocks | CA sector ETFs | US sector ETFs |
| Leverage used | No | Yes (~25%) | Yes (~25%) |
| Covered calls written | Directly on stocks | Via underlying ETFs | Via underlying ETFs |
| Currency hedge | None (native CAD) | None (native CAD) | Yes (CAD-hedged) |
| Options type | OTM | ATM up to ~50% | ATM up to ~50% |
| Upside potential | Partial (OTM) | Limited (ATM) | Very limited (ATM) |
| Complexity | Low | Moderate | High |
| Risk level | Medium | Medium-High | Medium-High |
| Recommended horizon | Medium to long term | Long term | Long term |
| Best account type | TFSA / RRSP / Non-reg | TFSA / Non-reg | TFSA / Non-reg |
Which ETF Should You Choose?
| If you are looking for… | Choose… |
| Stable monthly income with lower risk | ZWC |
| Higher Canadian income with moderate leverage | HDIV |
| Maximum monthly income with U.S. exposure | HYLD |
| Geographic diversification (CA + US) | ZWC + HYLD or HDIV + HYLD |
| One simple ETF to keep things easy | ZWC (simpler) or HDIV (higher yield) |
6. OTM vs ATM and Leverage: The Two Drivers That Explain Everything
Two technical mechanisms explain most of the differences between these three ETFs: the choice of option strike price (OTM vs ATM) and the use of leverage. Understand these two parameters and you understand why their yields and risk profiles diverge so significantly.
OTM vs ATM Summary Table
| OTM β ZWC | ATM β HDIV & HYLD | |
| Strike price | Above market price | At market price |
| Premium collected | Moderate | High |
| Upside potential | Partial (OTM) β | Very limited (ATM) β οΈ |
| Distribution yield | More modest | Higher |
| Total return (long term) | Potentially stronger in bull markets | Stronger in flat or falling markets |
How Does the Leverage in HDIV and HYLD Work?
HDIV and HYLD borrow approximately 25% of their net asset value from a Canadian financial institution. That borrowed capital is then invested in the same ETF portfolio.
Result: for every $100 invested in the fund, it deploys approximately $125 in the market.
Simplified Example
If the underlying portfolio rises 10%, a fund with no leverage gains 10%. With 25% leverage, that gain is amplified to approximately 12.5% (before borrowing costs). Conversely, a 10% decline becomes a loss of approximately 12.5%. That is the price of leverage.
What Leverage Is NOT
- It is not leverage via futures contracts or derivatives β it is straightforward bank borrowing.
- It is not designed for short-term traders β it is a long-term income strategy.
- It is not the same as 2x or 3x leveraged ETFs, which are far more aggressive.
The Combined Effect: ATM + Leverage
In HDIV and HYLD, the two mechanisms stack. The ATM strategy maximizes premiums (income), and leverage amplifies that income further. But in a strong bull market, both effects combine to limit capital growth: the ATM option surrenders the gain, and leverage cannot compensate for that lost upside.
This is not an inferior strategy β it is a different one. For an investor whose primary goal is regular monthly income, this combination is highly effective. For an investor who also wants capital growth, ZWC offers a more balanced profile.
7. Canadian Tax Considerations
The type of account in which you hold these ETFs can have a meaningful impact on your net return.
TFSA (Tax-Free Savings Account)
- All distributions received are completely tax-free.
- Ideal for all three ETFs if you have available contribution room.
- Note: for HYLD, U.S. withholding tax on dividends may slightly reduce net yield even within a TFSA.
RRSP (Registered Retirement Savings Plan)
- Distributions are not taxed immediately β only upon withdrawal.
- Good vehicle for ZWC and HDIV (Canadian markets, minimal foreign withholding tax).
- For HYLD, U.S. stock dividends held in an RRSP generally benefit from a withholding tax exemption under the Canada-U.S. tax treaty.
Non-Registered Account
- Distributions are taxable in the year they are received.
- The tax nature of distributions (eligible Canadian dividends, option premiums, return of capital) varies by fund β review your annual tax slips.
- Eligible Canadian dividends (such as those from ZWC) benefit from the dividend tax credit, which is favourable for Canadian residents.
This article does not constitute tax advice. For your personal situation, consult a tax advisor or a Chartered Professional Accountant (CPA).
8. Can You Combine ZWC, HDIV, and HYLD?
Yes β and many Canadian investors do exactly that. Here is how a combination can work in practice.
Sample Combined Income Portfolio
| ETF | Allocation | Role in the Portfolio | Target Profile |
| ZWC | 50% | Stable core, reliable income | Conservative |
| HDIV | 30% | Amplified Canadian income | Moderate |
| HYLD | 20% | U.S. diversification, max income | Income-growth |
This combination provides geographic diversification (Canada + United States), a balance between income and risk, and monthly distributions from all three ETFs.
This is an illustrative example only. Your allocation should reflect your personal risk tolerance, investment horizon, and financial goals.
Key Takeaways
- All three ETFs use the covered call strategy to generate monthly income β but with different mechanics.
- ZWC uses OTM options on individual Canadian stocks β more conservative, lower yield, but it retains more upside in rising markets.
- HDIV and HYLD use ATM options on up to 50% of their portfolio β generating higher premiums (and yields), but at the cost of limited capital growth.
- HDIV adds ~25% cash leverage to Canadian sector ETFs β amplifying both income and risk.
- HYLD applies the same leverage to U.S. tech-heavy ETFs β producing the highest monthly yield, but also the most upside surrendered.
- All three ETFs are eligible for TFSA, RRSP, RRIF, FHSA, and other registered Canadian accounts.
- Combining all three can provide meaningful geographic diversification for a passive income portfolio.
Conclusion
ZWC, HDIV, and HYLD are three excellent covered call ETFs β but they do not serve the same type of investor.
If you are just entering the world of high-income ETFs, ZWC is the ideal starting point: simple, proven, no leverage, with partial participation in market upside thanks to its OTM approach. If you want to amplify your income with diversified Canadian sector exposure, HDIV deserves serious consideration. And if you want to maximize monthly distributions while accessing U.S. markets without currency risk, HYLD is a powerful option β provided you fully understand what you are giving up.
Whatever your choice, make sure it aligns with your risk tolerance, investment horizon, and long-term income objectives.