9 Best Covered Call ETFs In Canada 2021: Simplify a Complex Strategy

Exchange-Traded Funds (ETFs) are becoming an increasingly popular investment vehicle for Canadian investors looking for a hands-free method to earn income by investing their money in securities.

With the wealth of ETFs available in Canada, there are several types that can meet a varying range of financial goals for investors.

Many investors who want to buy Canadian stocks might consider opting for a higher yield strategy that does not provide substantial overall returns but generates more passive income. Covered call ETFs are a popular type of ETF used to increase the income you can earn from an ETF.

In this post, I will talk about what covered call ETFs are, list down some of the best covered call ETF in Canada, and the benefits and drawbacks of owning these assets to help you determine whether investing in them would be suitable for you.

Best Covered Call ETFs In Canada

What Are Covered Call ETFs?

Covered calls are an ideal way to get insurance against potential trouble in the stock market. If you are an investor with a long position in a particular asset and you sell a call option for it to generate a profit in the process, it is considered to be a covered call.

The key to benefiting from the covered call approach is that the call option buyer will be obligated to pay a premium to purchase it.

It means that when the asset declines in value, the covered call will mitigate the losses. And if the asset appreciates, the seller can benefit, provided that the calls were out of the money. Covered call ETFs became available in Canadian markets in 2011, and there are over 70 covered call ETFs in Canada.

Covered call ETFs are actively managed funds. The fund manager first buys equities and then writes call options on these equities.

Example: Suppose that you are an investor who owns the hypothetical equity with a ticker symbol XYZ. You can write a contract giving a buyer an option to purchase your shares of XYZ at a specified price for a limited period of time.

The option will let the investor buy a fund’s individual holdings at a later time for a strike price (the specified price). You receive a premium payment to provide that option to the potential investor as the options writer.

The investor will give away any capital gains to you above the strike price in return for income. The stock’s performance does not matter because the fund keeps the premium regardless of its price. The fund keeps the premium income and pays it out to increase the fund’s overall yield.

Covered call ETFs in Canada hold the same equity securities that the regular ETF counterpart would hold. The only difference is that the fund manages to sell call options and write premiums on the equities held by the fund.

If you don’t want to learn how to write call options as it can get pretty complicated, what are your options? If you want to benefit from covered calls on equities, you can consider investing in a covered call ETF and let the fund managers do the work for you in exchange for a management fee.

Best Covered Call ETFs In Canada

Call Option

This section of the guide to the best covered call ETFs in Canada will list down some of the top assets available to Canadian investors and narrow down the list of funds you may have to consider if you want to invest in covered call ETFs.

1. BMO Covered Call Canadian Banks ETF (ZWB)

BMO logo

Here are the key facts and figures for BMO Covered Call Canadian Banks ETF:

  • Ticker: TSX:ZWB
  • Inception date: January 28, 2011
  • Assets Under Management (AUM): $2.25 billion (as of September 21, 2021)
  • Management fee: 0.65%

BMO Global Asset Management has the most substantial presence in the Canadian market when it comes to covered call ETFs, and BMO Covered Call Canadian Banks ETF is arguably the best covered call ETF in Canada.

The fund invests in securities of Canadian banks and writes covered call options for them. Designed for investors looking for higher income from equity portfolios with an annualized distribution yield of 5.79% as of September 10, 2021.

The call option writing reduces volatility, but it comes at the cost of 0.72% annually in management expenses.

2. BMO Canadian High Dividend Covered Call ETF (ZWC)

BMO logo

Here are the key facts and figures for BMO Canadian High Dividend Covered Call ETF:

  • Ticker: TSX:ZWC
  • Inception date: February 9, 2017
  • Assets Under Management (AUM): $1.17 billion (as of September 21, 2021)
  • Management fee: 0.65%

BMO Canadian High Dividend Covered Call ETF has been designed to provide investors with a focused exposure to equity securities that offer high dividend yields.

The fund’s holdings comprise these securities weighted based on the yields that the individual securities offer. The ETF also dynamically writes covered call options.

The fund is designed for investors seeking higher income from equity portfolios, allowing you to earn higher passive income from a portfolio of income-generating assets. The fund offers a juicy 6.49% annualized distribution yield as of September 10, 2021, but it comes with a management expense ratio of 0.72%.

3. BMO Covered Call Technology ETF (ZWT)

BMO logo

Here are the key facts and figures for BMO Covered Call Technology ETF:

  • Ticker: TSX:ZWT
  • Inception date: January 20, 2021
  • Assets Under Management (AUM): $21.06 million (as of September 21, 2021)
  • Management fee: 0.65%

BMO Covered Call Technology ETF is a relatively new covered call ETF that began trading earlier in 2021. The fund is designed to provide you with exposure to technology and technology-related companies trading in North American markets while earning call option premiums.

The fund offers you a higher income from equity portfolios focused on the tech sector in North America. It offers an annualized dividend yield of 4.41% as of September 10, 2021. It comes with a management expense ratio of 0.73%.

4. CI First Asset Health Care Giants Covered Call ETF (FHI)

CI Global Asset Management Logo

Here are the key facts and figures for CI First Asset Health Care Giants Covered Call ETF:

  • Ticker: TSX:FHI
  • Inception date: June 7, 2018
  • Assets Under Management (AUM): $60.83 million (as of September 20, 2021)
  • Management fee: 0.65%

CI First Asset Health Care Giants Covered Call ETF is a covered call fund provided by CI Global Asset Management.

The fund’s objectives are to provide you with an actively managed portfolio that pays regular cash distributions through exposure to a basket of at least the 20 largest health care companies on a North American stock exchange while using a covered call option writing program.

The ETF began trading on the stock market in 2018. It offers you quarterly dividend payouts at an annualized 1.90% dividend yield. Unfortunately, CI Global Asset Management has not made the total expense ratio for owning the fund available on its website.

5. CI First Asset Energy Giants Covered Call ETF (NXF)

CI Global Asset Management Logo

Here are the key facts and figures for CI First Asset Energy Giants Covered Call ETF:

  • Ticker: TSX:NXF
  • Inception date: February 4, 2015
  • Assets Under Management (AUM): $41.22 million (as of September 20, 2021)
  • Management fee: 0.65%

CI First Asset Energy Giants Covered Call ETF is a covered call fund provided by CI Global Asset Management. The fund’s objectives are to provide you with an actively managed portfolio of equity securities that focus on the energy sector on a North American stock exchange.

The fund comprises at least the 15 largest energy companies weighted based on their market capitalization, and it uses a covered call option writing program to offer you a higher income.

The ETF began trading on the stock market in 2015, offering quarterly dividends at an annualized 3.73% dividend yield. CI Global Asset Management has not made its management expense ratio available on its website.

6. CI First Asset Tech Giants Covered Call ETF (TXF)

CI Global Asset Management Logo

Here are the key facts and figures for CI First Asset Tech Giants Covered Call ETF:

  • Ticker: TSX:TXF
  • Inception date: October 24, 2011
  • Assets Under Management (AUM): $20.79 million (as of September 20, 2021)
  • Management fee: 0.65%

CI First Asset Tech Giants Covered Call ETF is a covered call fund provided by CI Global Asset Management that seeks to provide you with an actively managed portfolio of equity securities focused on the tech sector.

The fund holds at least the 25 largest tech companies trading in a North American exchange, weighted based on their market capitalization. It also uses a covered call option writing program to offer you a higher income.

The ETF began trading on the stock market in October 2011, offering quarterly dividends at an annualized 0.90% dividend yield. Its management expense ratio is not available on CI Global Asset Management’s website.

7. Horizons Enhanced Income Equity ETF (HEX)

horizons logo

Here are the key facts and figures for Horizons Enhanced Income Equity ETF:

  • Ticker: TSX:HEX
  • Inception date: March 16, 2011
  • Assets Under Management (AUM): $24.05 million (as of September 20, 2021)
  • Management fee: 0.65%

Horizons Enhanced Income Equity ETF is a covered call fund provided by Horizons ETFs. The fund seeks to provide you with exposure to the performance of an equal-weighted portfolio of large-capitalization Canadian companies.

It offers monthly dividend payouts and call options income. The fund manager typically writes covered call options on 100% of the equity securities it holds.

The ETF began trading on the stock market in 2011, pays its unitholders monthly dividends at an annualized 5.38% dividend yield, and comes with a management expense ratio of 0.84%.

8. Horizons Enhanced Income International Equity ETF (HEJ)

horizons logo

Here are the key facts and figures for Horizons Enhanced Income International Equity ETF:

  • Ticker: TSX:HEJ
  • Inception date: September 13, 2011
  • Assets Under Management (AUM): $10.26 million (as of September 20, 2021)
  • Management fee: 0.65%

Horizons Enhanced Income International Equity ETF is a covered call ETF offered by Horizons ETFs that seeks to provide you with exposure to the performance of an internationally diversified and equal-weighted portfolio of large-capitalization companies.

It offers monthly dividend payouts and call option income, and the fund management typically writes covered call options on 100% of the equity securities held by the fund.

The ETF began trading on the stock market in 2011, pays its unitholders monthly dividends at an annualized distribution yield of 4.73%, and comes with a management expense ratio of 0.84%.

9. Horizons Enhanced Income Financials ETF (HEF)

horizons logo

Here are the key facts and figures for Horizons Enhanced Income Financials ETF:

  • Ticker: TSX:HEF
  • Inception date: May 16, 2011
  • Assets Under Management (AUM): $15.59 million (as of September 20, 2021)
  • Management fee: 0.65%

Horizons Enhanced Income Financials ETF is a covered call ETF offered by Horizons ETFs that seeks to provide you with exposure to the performance of an equal-weighted portfolio of Canadian banking, financial, and financial services companies. It offers monthly dividend payouts and call option income.

The fund primarily focuses on Canadian banking and finance-sector companies, typically writing covered call options on 100% of the securities held by the fund.

The ETF began trading on the stock market in 2011. It pays its unitholders monthly dividends at an annualized distribution yield of 5.49% and comes with a management expense ratio of 0.84%.

Can You Write Covered Calls On ETFs?

asking why

Many ETFs are optionable, and you can write covered calls on those ETFs. The real question is: Is writing covered calls on ETFs a good options trading strategy as an investor?

Proponents of writing calls on ETFs highlight the diversification of ETFs, particularly the funds that target larger indexes since it is unlikely for an entire market index to decline overnight significantly. Using a covered call strategy with ETFs gives you the ability to target specific sectors of the economy.

However, writing covered calls on ETFs comes with lower premium levels compared to individual stocks due to the diversification offered by the funds.

If you are considering writing covered calls on ETFs, ensure that there is enough liquidity in the ETF’s options, avoid writing covered calls on volatile ETFs, and choose ETFs that can be considered conceivable long-term investments.

Or better yet, you can consider investing in one of the covered call ETFs listed above.

What Is A High-Dividend Covered Call ETF?

A high-dividend covered call ETF is a covered call ETF that owns high-yielding Canadian equity securities. The fund weights them in the portfolio based on their yield and diversifies across several sectors.

BMO Canadian High Dividend Covered Call ETF (ZWC) is an ideal example of a high-dividend covered call ETF. It is a relatively new ETF, so there is no 10-year performance information to help you understand its long-term performance, but there is an ETF it can compare to on the TSX.

The Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY) has nine of its top ten holdings similar to BMO ZWC, and it has provided 3% greater returns than BMO ZWC in the last three years.

The dividend yield offered by BMO ZWC is higher than that for Vanguard VDY. However, the more attractive dividend yield does not necessarily mean that the overall returns from BMO ZWC will be higher.

It is important to consider the total returns on your investments, and your total returns with high dividend covered call ETFs might not be as high as their dividend yields might make it seem.

Advantages And Disadvantages Of Covered Call ETFs

Pros and Cons

This section of my guide to the best covered call ETFs in Canada will cover the pros and cons of investing in these funds to help you make a more well-informed decision on whether they are worth adding to your portfolio.

Pros

  • Investing in covered call ETFs is far less time-consuming than writing options on ETFs yourself.
  • Covered call ETFs offer you regular passive income that is higher than what you can earn through fixed-income assets, and the yield offered by covered call ETFs is higher than their regular counterpart funds.
  • Covered call ETFs typically provide you with monthly payments, making them attractive for monthly income-seeking investors.

Cons

  • Covered call ETFs in Canada are actively managed funds. It means that they typically come with much higher fees than their regular counterparts.
  • Covered call ETFs cannot perform as well as the broader market during bull market conditions.
  • Covered call ETFs in Canada offer higher yields but provide you with lower overall returns due to higher fees.

How To Buy The Best Covered Call ETF In Canada

You can purchase covered call ETFs in Canada through most Canadian brokerage platforms that offer stock and ETF trading. My top choices are Wealthsimple Trade and Questrade.

ImageProduct TitleFeaturesPrice
Editor's Choice
Wealthsimple Trade
Wealthsimple Trade
  • ETF buys and sells have $0 trading fees
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Questrade
Questrade
  • ETF buys have $0 trading fees
  • Desktop and mobile trading
  • Most types of accounts available
Get $50 Free Stock Trades

To learn more, check out my full breakdown of the best trading platforms in Canada here.

Conclusion

Covered calls are relatively straightforward for more seasoned investors, but they are more complicated than navigating many other investing strategies. Many investors might feel too intimidated to explore the possibilities available to them through covered calls in the options market.

Investing in covered call ETFs simplifies the process for you by taking a lot of the detailed work of investing in this area out of your hands and place it under the care of the fund manager. Covered call ETFs also provide you with higher yields than their regular counterparts but offer lower long-term overall returns.

If you are looking for monthly dividend income through ETFs and want to enjoy more substantial overall long-term returns, you can check out my list of the best monthly dividend ETFs in Canada.

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Author Bio - Christopher Liew is a CFA Charterholder with 11 years of finance experience and the creator of Wealthawesome.com. Read about how he quit his 6-figure salary career to travel the world here.

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