The Top Canadian Covered Call ETFs for Boosted Income

WRITTEN BY Dan Kent | UPDATED ON: May 25, 2024

Canadian ETFs

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post. Stocktrades Ltd will run advertisements on our posts. These advertisements do not represent an endorsement by us.

Investors might opt for a strategy that provides a higher yield with lesser total returns, which facilitates more passive income. This very reasoning is causing Canadian-covered call ETFs to swiftly rise in popularity among Canadian investors.

These Canadian ETFs often hold the same holdings as their non-covered call counterparts. The difference is that the covered call variants attempt to boost their distributions by collecting premiums by selling call options.

If you don't know what a covered call options strategy is, we have in-depth commentary on the plan at the bottom of this article.

However, if you understand the strategy and want some of the best funds, you might want to pay attention to what we feel are the best-covered call ETFs in Canada.

The best covered call ETFs in Canada to buy right now

BMO Covered Call Canadian Banks ETF (TSE:ZWB)

The Canadian-covered call bank ETF by BMO serves a simple purpose. It will expose investors to all 6 central Canadian banks, including Royal Bank, TD Bank, and National Bank. The ETF will then sell covered call options on those stocks to generate income for its unit holders.

BMO Covered Call Canadian Banks ETF (TSE:ZWB) has more than $2.7B in assets under management at the time of writing, and its distribution is currently more than 8%. When we compare this to ZEB, BMO's non-covered call Canadian bank ETF that yields in the low 5% range, its distribution isn't quite double, but it's close.

There isn't much else to say about the ETF. Its simple structure might be why it is so popular. It contains some of the best Canadian companies in the country in the Big 6 banks and significantly boosts your income with a monthly distribution.

In terms of returns, it has undoubtedly lagged ZEB. A significant margin fades it. However, we must understand that we will sacrifice total returns for higher income in bull markets.

Thanks to weakness in the underlying bank stock as of late, this fund has struggled to just a 21% return over the last five years, which is after management fees of 0.65% are paid annually. This works out to just under 4% per year. 

BMO Canadian High Dividend Covered Call ETF (TSE:ZWC)

Our stocks in Canada are well known for producing high dividend income. This is because we have particular sectors, such as the telecom and utility sectors, which contain significant economic moats, pricing power, and some of the country's best dividend stocks.

BMO has taken many of these companies, placed them into a fund, and now sells covered call options for some significant income.

At the time of writing, BMO Canadian High Dividend Covered Call ETF (TSE:ZWC) has a nearly 8.5% distribution yield and pays out monthly. That means a $100,000 investment into ZWC would have you collecting $583.33 in passive income monthly.

The fund contains many high-yielders already, such as Enbridge, BCE, Scotiabank, Telus, Manulife, and TC Energy. When we start collecting call option premiums on these companies, it can accelerate gains.

Because of this fund's blue-chip nature, option premiums are likely a bit lower. After all, people will be willing to buy a call option on a high-growth option like Shopify for much more than a stock that doesn't move like BCE. So, this can somewhat limit your investment return on the covered call side.

But, the blue-chip makeup of this covered call ETF is one of the primary reasons it could become a core holding in a Canadian's portfolio, especially one looking for additional income. It allows you to hold some of the strongest stocks in the country and collect some serious passive income.

In terms of performance, it's hard to gauge. The fund was introduced in late 2017, so it hasn't had much time to establish a strong history of results. We do have to understand that these funds are actively managed. So, historical results can strongly indicate how a management options strategy is playing out.

Like with the covered call bank ETF, this fund has struggled as the underlying stocks have struggled. Still, if you reinvested distributions, the investment gained 4.5% per year over the last five years. These returns are after paying the 0.65% management expense ratio.

BMO Europe High Dividend Covered Call ETF (TSE:ZWP)

ZWP is an interesting covered call ETF offered by BMO yet again. BMO Europe High Dividend Covered Call ETF (TSE:ZWP) aims to provide Canadians with exposure to the European markets while providing a monthly boost in income.

With assets under management of $736M, this is one of the smaller ETFs on this list. However, its distribution is not tiny, paying investors in the high 7% range annually. The fund contains some of the largest companies overseas, such as Rio Tinto, Roche Holdings, Unilever, Nestle, Sanofi, and Novartis.

In terms of exposure by country, nearly a quarter of the fund is exposed to Switzerland, while other notable double-digit exposures include Germany, the United Kingdom, and France. It isn't a pure-play European ETF, with just under 7% exposure to US equities.

When we look at performance, we again come to a situation where there simply hasn't been enough time to see the fund's covered call strategy play out.

It has gained approximately 4% per year since inception, and the fund did mitigate some downside during the COVID-19 pandemic with a max drawdown of just over 30%, less than most major North American indexes.

Overall, this fund provides excellent exposure for those who want international exposure but also want high income, particularly in Europe. Remember, if you're looking for a currency-hedged variation of this, the ticker is ZWE.

BMO Covered Call Technology ETF (TSE:ZWT)

I'd be entirely against owning a covered call ETF regarding technology companies. As mentioned at the start of the article, a bullish environment is generally bad for covered call selling. And although future results are never guaranteed, technology stocks have historically outperformed other sectors.

The central thesis for BMO Covered Call Technology ETF (TSE:ZWT) will be if you believe that tech companies are about to go through somewhat of a lull due to the possible recession.

A vital element of this ETF? It contains US-listed companies. So, there will be tax implications regarding the distribution, as some will be dividends from foreign companies. Its top holdings include Microsoft, Apple, Google, and Visa.

It is the youngest ETF on this list, as BMO jumped on the current covered call craze and started this one in early 2021. I'd imagine this is somewhat of a response to the famous covered call ETF south of the border in QYLD.

In the mid-4 % range, its dividend yield isn't even remotely close to QYLD. The fund's investment objectives differ slightly, and it doesn't sell as many covered calls. In terms of past performance, even though we have minimal history, the two funds have returned practically the same.

Expenses on this fund are 0.73%, or $7.30 per $1000 invested, and it is a strong option for those looking to generate some income from fast-growing stocks or a bet on a lagging tech sector over the next few years.

CI Energy Giants Covered Call ETF - Unhedged (TSE:NXF.B)

With the resurgence in the oil and gas sector, many investors are flocking to it for income. If you want to turbocharge that income, the CI Energy Giants Covered Call ETF (TSE:NXF.B) could be for you. It is the unhedged ETF, but you can purchase the hedged one by taking out the. B.

The fund aims to expose Canadians to some of the largest energy producers in the world, including Royal Dutch Shell, ConocoPhillips, Hess Corp, BP, Suncor Energy, Canadian Natural Resources, and Chevron.

The fund has a daily volume above 4500 shares and net assets of just over $580M. The fund was introduced in mid-2015 and is one of CI's more popular funds, especially recently.

Performance has been lacklustre since its inception. However, the critical thing to understand is that in a cyclical industry such as oil and gas, there will always be ebbs and flows to performance.

If we look at the last year, for example, the fund has returned about 8%. Three-year performance is much better, with a total return of 43% annually.

You'll likely need to time the cycles on this one and exit when oil inevitably retakes a downturn. However, this ETF lets you collect a whopping 9.2% distribution with management fees of around 0.65%.

Remember that with a max drawdown of 60%, another oil price crash would add considerable volatility to your portfolio—something to consider alongside its high yield.

Lets discuss options contracts further

What is a call option?

Call options are a contract that gives the buyer of the option the right but not the obligation to purchase stock from the seller of the option at a set price for a limited amount of time.

Put options are the opposite, where the buyer of the option has the right to sell a stock to the seller of the option. However, that's a topic for another article.

The call option buyer pays the seller a premium for the right. As a generic example, you may pay a $100 premium right now to have the right to purchase 100 shares of stock ABC by March 19th, 2023, at a particular price called the strike price.

Or, as the seller of a call option, you will receive $100 now but have to be willing to sell 100 shares of ABC stock to the option buyer on or before March 19th, 2023, at the strike price.

Investors can sell call options on stocks they own, known as a covered call option, or on stocks they do not own, known as a naked call option.

What is a covered call investing strategy?

As I mentioned, you need to own the underlying stock on which you're selling the call option for it to be classified as a covered call. So, why are we doing this?

With a covered call strategy, we hope to collect the option premium we receive by selling that cover call and hanging on to the stocks we own. Let's review a simplified example of how a covered call strategy can benefit and hurt you, as there are two sides to this coin.

For the next section, we'll assume that we own 100 shares of stock ABC, trading at $100 and paying a $5 per year dividend. We're looking to eke out some extra income from this holding, so we decided to sell some covered calls with a $110 strike price, expiring in a few months. Let's assume, for this example, we've collected $200 in premiums.

The pros of covered calls

If the stock price trades sideways for the next two months, we'll have collected $200 in premium income and still hold our 100 shares of stock ABC.

Over the year, this can add considerable income to our total "yield" of the 100 stocks. Although the company isn't paying us anymore, we're collecting money from investors speculating or hedging by buying our call options.

Remember that you can take more or less risk by adjusting your strike price. For example, a $150 strike price will likely expire useless, but you'll collect significantly less premium than one with a $105 strike. This is primarily derived from an option's time, intrinsic value, and volatility. But that is a tutorial for another article.

The cons of covered calls

If company ABC issues strong earnings over the next few months and the stock rises to $130, we'll be forced to do two things. We will have to repurchase a call option to counter the sale, or we will have the option we sold exercised, and we'll be forced to sell the stocks at our strike price.

In this case, we'll be forced to sell a $150 stock for $130, losing $2000.

This is the primary case against a covered call strategy. In rising markets, selling covered calls is typically a losing proposition as they cap your upside potential. However, during bear markets, they can lower your downside risk and increase your income.

With that being said, who are Canadian covered call ETFs for?

We're strong advocates for total return investing here at Stocktrades. That means that whether it is through capital appreciation, dividends, or interest, all that matters in terms of investment results, in the end, is your final return.

However, covered call ETFs are excellent for those willing to sacrifice overall gains for more income. Yes, your upside is capped due to the covered-call nature of the fund, but you'll also have more dollars in your bank account to fund your retirement or pay your bills.

You will also have a little reprieve regarding market volatility as they have some downside protection.

**Of note, you must review each fund's prospectus. They will have different strategies, and we recommend becoming familiar with them before buying one. If one would like to expand their knowledge in ETFs, these are great research points, along with niche growth ETFs, all-in-one ETFs, dividend ETFs, etc.

This list is by no means an all-in-one guide

There are way too many covered call ETFs here in Canada to ever have a definitive list of the top options. But it should at least help you begin your research into a prospect that works for you or presents some info to get your feet wet if you are just learning how to buy stocks.

You'll also notice that through the majority of this article, there is a common theme. BMO has a stranglehold on the covered call ETF market here in Canada. Most of their funds have the most significant AUM and trading volume and are among the best managed.

Are you really into income ETFs? Don't miss the best high-yielding ETFs in Canada.