The Top Canadian Covered Call ETFs for Boosted Income

Posted on September 28, 2023 by Dan Kent
Canadian ETFs

Those who are looking to invest might opt for a higher yield strategy, one that provides less overall returns, but more passive income.

Canadian covered call ETFs are becoming extremely popular among Canadian investors for this exact reason.

These Canadian ETFs often hold the exact same holdings as their non-covered call counterparts. The difference being the covered call variants are attempting to boost their distributions by collecting premiums through selling call options.

If you understand what covered call strategies are, feel free to skip to the top Canadian covered call ETFs portion of the article. But if not, we will go over a quick example of what one is.

Keep in mind we'll be speaking from an individual perspective below, but these are the exact same strategies a covered call ETF would be following.

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 write to sell a stock to the seller of the option. However, that's a topic for another article.

The buyer of a call option 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 have the option to 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 you're selling the call option on for it to be classified as a covered call. So, why are we doing this?

With a covered call strategy, we're hoping to collect the option premium we receive by selling that covered call, and also hang on to the stocks we own as well.

Let's go over a simplified example of how a covered call strategy can benefit you and hurt you, as there are certainly two sides to this coin.

For the purpose of 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 decide to sell some covered calls with a $110 strike price, expiring in a couple of months. Let's assume for the purpose of 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 course of the year, this can add a considerable amount of income to our total "yield" of the 100 stocks. Although the company itself isn't paying us any more money, we're collecting money from investors speculating or hedging by buying the call options from us.

Keep in mind, that you can take more or less risk by adjusting your strike price. For example, a $150 strike price will more than likely expire useless, but you'll collect significantly less premium than one with say a $105 strike. This is primarily derived from both the time and intrinsic value of an option, along with 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 buy a call option back to counter the sale of ours, 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 out on $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, for those who are willing to sacrifice overall gains for more income, covered call ETFs are an excellent option. 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 in terms of market volatility as they do have some downside protection built in.

If you're one of those people, you might want to pay attention to what we feel are the best covered call ETFs in Canada right now.

**Of note, it's very important you review the individual prospectus of each fund. All of them will have different strategies, and our recommendation is to become very familiar with these strategies prior to buying one.

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

There is 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 an option 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. And that is that BMO has a stranglehold on the covered call ETF market here in Canada. Most of their funds have the largest AUM, trading volume, and are among the best managed.

Crazy about income ETFs? Don't miss the best high yielding ETFs in Canada.

The best covered call ETFs in Canada to buy right now

  • BMO Covered Call Canadian Banks ETF (TSE:ZWB)
  • BMO Canadian High Dividend Covered Call ETF (TSE:ZWC)
  • BMO Europe High Dividend Covered Call ETF (TSE:ZWP)
  • BMO Covered Call Technology ETF (TSE:ZWT)
  • CI Energy Giants Covered Call ETF - Unhedged (TSE:NXF.B)

BMO Covered Call Canadian Banks ETF (TSE:ZWB)

The Canadian covered call bank ETF by BMO serves a simple purpose. It will give investors exposure to all of the 6 major Canadian banks including the likes of Royal Bank, TD Bank, and even National Bank. The ETF will then sell covered call options on those stocks to generate income for its unit holders.

The ETF has nearly $2.93B in assets under management at the time of writing and its distribution is in the high 6% range. When we compare this to ZEB, which is BMO's non covered call Canadian bank ETF that yields in the low 4% range, its distribution isn't quite double, but it's close.

There isn't much else to say about the ETF. In fact, it's 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 provides a significant boost to your income with a monthly distribution.

In terms of returns, it has certainly lagged ZEB. In fact, it's lagged by a significant margin. However, it's important we understand that we are going to sacrifice total returns for higher income in bull markets. 

It has still managed to return double digit annualized returns over the last half decade if you had reinvested the distribution, and this is after management fees of 0.65% are paid on an annual basis.

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

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

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

At the time of writing, the fund has a near 7% distribution yield and pays out on a monthly basis. That means a $100,000 investment into ZWC would have you collecting $583.33 in passive income every single month.

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 really accelerate gains.

Because of the blue-chip nature of this fund, it's likely option premiums are 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 why it could become a core holding in a Canadian's portfolio, especially one that is looking for some 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 be a strong indicator of how a managements options strategy is actually playing out.

But, since late 2017 if you had reinvested the distributions, you'd be sitting on high single digit annualized gains. These returns are after paying the 0.65% management expense ratio, of course.

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

ZWP is an interesting covered call ETF offered by BMO yet again. The ETF aims to provide Canadians with exposure to the European markets while providing them with a boost in income on a monthly basis.

With assets under management of $786M, this is one of the smaller ETFs on this list. But, its distribution is by no means small, paying investors in the high 6% range on an annual basis. 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. This isn't a pure-play European ETF either, as it does have just under 7% exposure to US equities.

When we look to performance, we again come to a situation where there simply hasn't been enough time to clearly see the fund's covered call strategy play out. It has lost 17% total since it started in mid to late 2018, 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 some nice exposure for those who want international exposure, particularly in Europe, but also want high income. Keep in mind, if you're looking for a currency hedged variation of this, the ticker is ZWE.

BMO Covered Call Technology ETF (TSE:ZWT)

For the most part, I'd be completely against owning a covered call ETF when it comes to 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 main thesis for this ETF would be if you believe that tech companies are about to go through somewhat of a lull due to the possible recession.

A key element of this ETF? It contains US-listed companies. So, there will be tax implications in terms of the distribution as some of them will be dividends from foreign companies. Its top holdings contain the likes of 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 popular covered call ETF south of the border in QYLD.

In the high 5% range, its dividend yield isn't even remotely close to QYLD. The fund's investment objectives are a little different and it doesn't sell as many covered calls. In terms of past performance, even though we do have very little 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 could be for you. This is the unhedged ETF, but you can purchase the hedged one by taking out the .B.

The fund aims to give Canadians exposure 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 daily volume in excess of 4500 shares a day and net assets of just over $580M. The fund was introduced in mid 2015 and is one of CI's more popular funds, especially as of late.

Performance has been lackluster since its inception. However, the important 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 to the last year for example, the fund has returned over 35%.

You'll likely need to time the cycles on this one and exit when oil inevitably takes a downturn again. However, this ETF lets you collect a whopping 9.5% distribution with management fees of around 0.65%.

Just keep in mind, with a max drawdown of 60%, another crash in the price of oil would add considerable volatility to your portfolio. Something to consider alongside its high yield.

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.

Dan Kent

About the author

An active dividend and growth investor, Dan has been involved with the website since its inception. He is primarily a researcher and writer here at Stocktrades.ca, and his pieces have numerous mentions on the Globe and Mail, Forbes, Winnipeg Free Press, and other high authority financial websites. He has become an authority figure in the Canadian finance niche, primarily due to his attention to detail and overall dedication to achieving the highest returns on his investments. Investing on his own since he was 19 years old, Dan has compiled the experience and knowledge needed to be successful in the world of self-directed investing, and is always happy to bring that knowledge to Stocktrades.ca readers and any other publications that give him the opportunity to write. He has completed the Canadian Securities Course, manages his TFSA, RRSPs and a LIRA at Qtrade, and has compiled a real estate portfolio of his primary residence and 2 rental properties, all before his 30th birthday.