best covered call etf canada

10 Best Covered Call ETF Canada – High dividend yield

Covered call ETFs are very popular with Canadian investors. Some of these ETFs managers have billions of dollars under management. In this post, we will discuss the best covered call ETFs offered in Canada. Three reasons push investors towards covered call ETFs:

High dividend yield: thanks to the premiums earned when writing call options, the manager under certain conditions can earn premiums and enhance distributions;

Low volatility. Writing a call option is a conservative strategy aimed at reducing volatility;

Great for passive income: if you’re main objective is to achieve high dividend yields and build passive income, then covered call ETFs are a good option. But, remember the high dividend yield comes at a price which very low growth potential.

This post is available in video format!

US Stocks that pay monthly dividends (Full list by sector)

How writing a call option works?

Options make it possible to hedge a possible decline in a security and thus limit its loss through a gain on the option. To apply this hedging strategy, you have to take a short position on a call option, in other words sell a call.

The sale of calls achieves two objectives:

· Set the sale price of these securities (exercise price) and therefore set an acceptable loss.

· Collect a premium, i.e. additional income, or limit losses if the strike price is reached.

The option seller will be obligated to deliver the securities if exercised at the price fixed in advance. In this case the market will have evolved contrary to these expectations, it will have appreciated. The option investor will sell his securities for less than the market price.

Covered call options protect against downside risk. This being said, the covered call strategy provides limited downside protection. Also, when you write a covered call, you give up some of the stock’s potential gains. Covered call ETFs will tend to have a higher yield and a lower performance.

Practice example: covered call strategy

An investor has 100 shares of Company A in his portfolio. Company A’s share is worth $ 30. He anticipates a stagnation or a slight drop in its price and he is ready to sell them at the price of 26 $. He decides to sell a call with the following characteristics:

• Exercise price: $ 26; • Maturity: April; • Option price: $ 4; • Quantity: 100

He collects the following amount: 4 x 100 or 400 $ (premium)

Two cases should be distinguished:

CASE 1

Company A’s share price rose above the breakeven point of $ 30.

Break-even point = exercise price + premium = 26 + 4 = 30

The buyer of the option will choose to exercise his right to buy and, as the seller of the call, the seller will have to sell the shares at the strike price.

During this operation:

  • the seller sold his shares for $ 26, which constitutes an acceptable loss for him.
  • the seller collected the amount of the premium of $ 4, which helped boost the performance of his investments (yield).

CASE 2

Company A’s share price has fallen below the breakeven point of $ 30.

The buyer of the option will choose not to exercise his right to buy and the seller will not have to sell his shares.

Thanks to this operation, the seller keeps his shares in the portfolio and he collected the amount of the premium which generated an additional return.

Can you lose money on a Covered Call ETF?

The short answer is yes. Covered call ETFs are volatile and the returns depend greatly on the performance of the underlying asset. Even if you receive generous dividends, a low price performance of the ETF can wipe out all the benefits. It’s preferable to hold these type of ETFs for the long term.

Expected investment outcome with covered call ETFs

In a robust bull market, where the price of the underlying stock rises above the strike price plus the option premium, the covered call writer will underperform.

Due to earning the option premium, the covered call writer can normally anticipate to outperform merely holding the stock in flat, decreasing, and mildly rising markets.

 Covered call strategy
Bull Marketlags in terms of
performance
Modest Bull MarketOutperforms the index
Volatile market
(frequent ups and downs)
Outperforms the index
Beat marketOutperforms the index

List of Best Covered Call ETF in Canada

NameAUM*MER
ZWB –BMO Covered
Call Canadian Banks
2.6B0.72
ZWC –BMO CDN High
Div Covered Call
1.3B0.72
ZWP –BMO Europe
High Div Cov Call
935M0.71
ZWH –BMO US High
Dividend Covered Call
918M0.71
ZWK -BMO Covered
Call US Banks 
230M0.71
HTA -Harvest Tech
Achievers Growth & Inc
239M0.99
HBF –Harvest Brand
Leaders Plus Income
316M0.96
LIFE –Evolve Global
Healthcare Enhance Yld
154M0.68
HDIF -Harvest Diversified
Monthly Income ETF
169Mna
HDIV -Hamilton Enhanced
Multi-Sector Covered Call
218Mna
Source: TD Market research, MER: Management Expense Ratio / Best Covered Call ETF Canada

Performance and dividend yield comparison

Updated daily

Div Yld
ZWB6.99
ZWC6.86
ZWP7.67
ZWH6.11
ZWK7.74
HTA9.30
HBF7.63
LIFE8.22
HDIF10.05
HDIV9.58
Source: Yahoo Finance as of January 3rd / YTD Year to date – Best Covered Call ETF Canada

Full list of ‘Dividend Kings’ stocks by sector – 2022

6 Best Long-Term Dividend Stocks with high total returns

Top 5 Best Canadian REITs ETF in 2022

Analysis – Best covered call ETFs Canada

ZWC is a great option if you are seeking a diversified ETF that invests in the Canadian Economy. This fund offers an attractive yield. Since it’s a covered call ETF, it was less impacted by the recent correction in the market. The long term performance is decent.

HDIV and HDIF are strong competitors to ZWC. These ETFs are diversified accorss various sectors. They use the covered call strategy plus additional leverage to push even higher the dividend yield. Since these two ETFs are relatively new, their performance and MER are not yet published. One thing is certain, though, the MER for both HDIV and HDIF will definitely be higher than ZWC. Also, the additional leverage used by these funds enhances the yield but also creates more risk for investors.

ZWB is an excellent play if you are seeking exposure to Canadian banks. The long term performance is also great. Canadian banks are known for their solid dividends and most major Canadian banks are dividend aristocrats.

ZWH is ideal for investors looking for US dividends in their portfolio. This fund invests in large US corporations such as Apple. Microsoft…etc. It has also excellent sector diversification. In the same category, HBF is a great choice too. HBF invests mainly in large US corporations that hold brand power in their industries. The fund had a great historical performance in addition to an attractive yield.

HTA boast an amazing long term performance thanks to its 100% exposure to large Teck stocks. However, the performance since the start of the year is the worst among all the ETFs selected. Some consider this a perfect time to buy on weakness to benefit from the enhanced yield and the future potential of Tech stocks.

Finally, LIFE is an excellent ETF that offers exposure to the healthcare sector. In total, 20 large health stocks make up LIFE’s portfolio.

Dividend frequency: Best Covered Call ETF Canada

Frequency
ZWBMonthly
ZWCMonthly
ZWPMonthly
ZWHMonthly
ZWKMonthly
HTAMonthly
HBFMonthly
LIFEMonthly
HDIFMonthly
HDIVMonthly
Frequency Dividend Distribution 2022 – Best Covered Call ETF Canada

ZWB – BMO Covered Call Canadian Banks

The ZWB aims to provide exposure to a portfolio of dividend-paying securities (Canadian Banks), while collecting premiums related to call options. The portfolio is chosen on the basis of the criteria below:

• dividend growth rate; •  yield; • payout ratio and liquidity.

ZWB holdings

NameWeight
BMO Equal Weight Banks ETF27.2%
  Bank of Montreal12.9%
Canadian Imperial Bank of Commerce12.7%
Royal Bank of Canada12.1%
National Bank of Canada11.9%
  The Toronto-Dominion Bank11.9%
Bank of Nova Scotia11.4%
Please visit issuers’ website for up-to-date figures – Best Covered Call ETF Canada

ZWC –BMO CDN High Div Covered Call

The BMO Canadian High Dividend Covered Call ETF (ZWC)  has been designed to provide exposure to a dividend focused portfolio, while earning call option premiums. The underlying portfolio is yield-weighted and broadly diversified across sectors.

The fund selection methodology uses 4 factors: – Liquidity; – Dividend growth rate; – Yield and payout ratio.

ZWC is an excellent option for conservative investors looking for a steady income and low volatility. It’s tax-efficient because the dividends are all coming from Canadian companies. The financial sector and Energy represents 53% of the total overall sector allocation.

ZWC ETF Holdings

Company NameAllocation
Canadian National Railway Co5.4%
BCE Inc5.2%
TELUS Corp5.1%
Enbridge Inc5.0%
Royal Bank of Canada5.0%
Canadian Imperial Bank of Commerce4.9%
Bank of Nova Scotia4.7%
The Toronto-Dominion Bank4.6%
Manulife Financial Corp4.3%
Please visit issuers’ website for up-to-date figures – Best Covered Call ETF Canada

ZWP – BMO Europe High Dividend Covered Call ETF

The BMO Europe High Dividend Covered Call ETF (ZWP) has been designed to provide exposure to a dividend focused portfolio. These dividend paying companies are selected based on:

  • dividend growth rate,
  • yield,
  • payout ratio and liquidity.

ZWP Dividend ETF Holdings

Company NameAllocation
Roche Holding AG4.0%
Nestle SA4.0%
Novartis AG4.0%
GlaxoSmithKline PLC4.0%
Sanofi SA3.8%
TotalEnergies SE3.7%
Unilever PLC3.7%
Enel SpA3.7%
Please visit issuers’ website for up-to-date figures – Best Covered Call ETF Canada

Geographic allocation

CountriesWeight
Switzerland23.66%
Germany24.24%
United Kingdom18.76%
France16.72%
Other (multiple countries)16.62%
Please visit issuers’ website for up-to-date figures

Sector allocation

TypeFund
Information Technology6.22
Industrials12.18
Consumer Discretionary11.56
Consumer Staples11.78
Health Care16.56
Financials14.79
Materials9.48
Communication8.10
Energy3.89
Utilities3.66
Please visit issuers’ website for up-to-date figures – Best Covered Call ETF Canada

ZWH – BMO US High Dividend Covered Call ETF

ZWH has been designed to provide exposure to a dividend focused portfolio, while earning call option premiums. The underlying portfolio is yield-weighted and broadly diversified across sectors. The Fund utilizes a rules-based methodology that considers the following criteria:

dividend growth rate,

yield,

payout ratio,

liquidity.

ZWH Dividend ETF Holding

Company NameAllocation
Apple Inc4.2%
Microsoft Corp4.2%
Coca-Cola Co4.1%
AbbVie Inc4.1%
The Home Depot Inc4.1%
Procter & Gamble Co4.1%
Pfizer Inc4.0%
Please visit issuers’ website for up-to-date figures

Geographic allocation

CountryFund
USA100.0%
Please visit issuers’ website for up-to-date figures

Sector allocation

SectorFund
Information Technology22.61%
Industrials8.39%
Consumer Discretionary10.06%
Health Care12.40%
Financials15.50%
Materials4.36%
Communication9.58%
Consumer Staples7.35%
Energy3.86%
Utilities3.84%
Real estate2.05%

Please consult issuers’ website for up-to-date figures

ZWK -BMO Covered Call US Banks 

The BMO Covered Call U.S. Banks ETF (ZWK) is professionally managed by BMO Global Asset Management. The fund has been designed to provide exposure to a portfolio of U.S. banks while earning call option premiums.

The fund invests in 38 US Banks. It’s ideal for investors looking for dividend income. The dividend yield on November 24th was 6.19%!

The fact that the fund uses call options accomplishes two things:

  • increases the dividend yield;
  • reduces volatility but also growth potential. So, it’s something to keep in mind.
Weight (%)Name
5.86%SIGNATURE BANK/NEW YORK NY
5.58%CITIZENS FINANCIAL GROUP INC
5.55%REGIONS FINANCIAL CORP
5.52%AMERIPRISE FINANCIAL INC
5.52%M&T BANK CORP
5.46%SVB FINANCIAL GROUP
5.43%KEYCORP
5.41%TRUIST FINANCIAL CORP
5.40%FIFTH THIRD BANCORP
5.38%BMO EQUAL WEIGHT US BANKS INDEX ETF

HTA -Harvest Tech Achievers Growth & Income 

HTA is an ETF that invests in an equally weighted portfolio of 20 large-cap technology companies (globally). In order to generate an enhanced monthly distribution yield, an active covered call strategy is engaged.

Covered call strategies are great as they generate additional income for investors (in the form of premiums). The strategy is somewhat conservative and aims at preserving the capital invested primarily. On the other hand, the strategy limits potential growth.

NameWeightSector
NVIDIA Corporation6.9%Semiconductors
Advanced Micro
Devices, Inc.
6.5%Semiconductors
QUALCOMM Inc6.5%Semiconductors
Intuit Inc.5.5%Software
Apple Inc.5.3%Technology Hardware
Applied Materials5.2%Semiconductors
Keysight Technologies5.2%Electronic Equipment
Broadcom Inc.5.1%Semiconductors
Microsoft Corp5.1%Software
Adobe Inc.5.0%Software

HBF – Harvest Brand Leaders Plus Income

HBF is an equally weighted portfolio of 20 large companies selected from the world’s Top 100 Brands. The ETF is designed to provide a consistent monthly income stream with an opportunity for growth. In order to generate an enhanced monthly distribution yield, an active covered call strategy is engaged.

HBF Holding details

Company NameAllocation
JPMorgan Chase & Co5.4%
Royal Dutch Shell PLC
ADR Class A
5.3%
McDonald’s Corp5.3%
Alphabet Inc Class A5.2%
Microsoft Corp5.2%
Citigroup Inc5.1%
The Walt Disney Co5.1%

HBF Sector breakdown

Sector% Allocation
Financial Services20.2%
Technology20.1%
Comm. Services15.3%

LIFE– Evolve Global Healthcare Enhance Yld ETF

LIFE seeks to replicate the performance of the Solactive Global Healthcare 20 Index.  This is an equally weighted index of 20 global health care companies.

LIFE ETF writes covered call options on up to 33% of the portfolio securities, at the discretion of the Manager. The level of covered call option writing may vary based on market volatility and other factors.

LIFE.B is non hedged. LIFE is Canadian hedged to reduce exchange risk.

Though LIFE ETFs offer a interesting yield, the performance was negative.

LIFE and LIFE-B high dividend ETF Holdings

NAMEWEIGHTCOUNTRY
Danaher Corp5.18%UNITED STATES
Novartis AG5.12%SWITZERLAND
Intuitive Surgical Inc5.10%UNITED STATES
CSL Ltd5.08%AUSTRALIA
AstraZeneca PLC5.07%BRITAIN
Pfizer Inc5.01%UNITED STATES
AbbVie Inc5.01%UNITED STATES
Medtronic PLC4.92%IRELAND
Sanofi4.88%FRANCE
GlaxoSmithKline PLC4.86%BRITAIN
Please consult issuers’ website for up-to-date figures

HDIF -Harvest Diversified Monthly Income ETF

HDIF is a relatively new fund from Harvest ETFs (created on Feb 2022). It’s a covered call ETF and its main target audience are income/dividend investors.

HDIF is a fund of funds. It means this ETF invests in other ETFs to provide investors with diversification across various sectors of the economy ( Healthcare, Global Brands, Technology, Utilities, and US Banks). The primary objective is to provide a higher yield than traditional dividend ETFs by using a covered call strategy.

Additional facts about HDIF:

– The portfolio is reconstituted and rebalanced quarterly (minimum);

– The covered call strategy is applied on up to 33% of each equity securities held in underlying portfolios.

Sector allocation

Sector% Allocations
Financial Services31.8%
Healthcare21.8%
Technology23.4%
Comm. Services15.0%
Utilities13.7%

HDIF ETF review: Portfolio

ETFAllocation
HUTL Harvest Equal Weight Glbl Utilts Inc20.5
HHL Harvest Healthcare Leaders Inc20.3
HBF Harvest Brand Leaders Plus Inc20.7
HUBL Harvest US Bank Leaders Income Cl A20.7
HTA Harvest Tech Achievers Gr&Inc20.7
HLIF Harvest Canadian Equity Income Leaders ETF23.3
Cash and other Liabilities(26.2)

Please visit issuers’ website for most up-to-date data

HDIV -Hamilton Enhanced Multi-Sector Covered Call

HDIV is a passive covered call ETF. It’s ideal for investors who seek high dividend income and low volatility. HDIV invests in a basket of 7 covered call & sector focus ETFs. The fund manager uses also cash leverage of 25% to enhance yield and growth potential. The index tracked is The Solactive Multi-Sector Covered Call ETFs Index TR x 1.25.

The ETFs held within HDIV invest primarly in large corporations. In addition to using the covered call strategy, the funds ensure diversification of your investments across various sectors. See below the list of the 7 ETFs that make up HDIV:

HEP – Horizons Enhanced Income Gold Producers
NXF – CI Energy Giants Covered Call
ZWU – BMO Covered Call Utilities
HHL – Harvest Healthcare Leaders Income
FLI – CI U.S. & Canada Lifeco Income
ZWB – BMO Covered Call Canadian Banks
HTA – Harvest Tech Achievers Growth & Income

All the funds that make up HDIV are covered call ETFs offered by various issuers such as: Harverst, BMO, CI Financial and Horizons.

Video

Q&A

Do covered call ETFs pay dividends?

Yes, Covered call ETF’s offer an excellent dividend yield. Their dividend yield is usually superior to ‘regular’ dividend ETF’s. Thanks to premiums collected issuing covered calls, the manager boost the fund distributions (Dividends plus Premiums), thus the dividend yield is usually high.

Some Covered Call ETFs use leverage to enhance returns even higher.

Do covered calls beat the market?

During market corrections, the answer would be probably yes. In essence, the covered call strategy is a convervative strategy that tends to forego profits for stability and income.

In a bull markets, covered call ETFs would have a lousy performance. A ‘regular’ dividend ETF would definitely perform better in bull market that a Covered call ETF.

If you are retired or close to retiring, a covered call ETF could be a better option for you. For young investors building wealth, covered call ETFs are not a good choice because they deprive their holders of growth perspective.

How risky is covered calls?

Covered call ETFs are generally low to medium risk funds. However, if the fund manager uses leverage, the fund would be considered medium to high risk.

Leave a Comment

Your email address will not be published. Required fields are marked *