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What Is a Covered Call ETF?
A covered call ETF holds a portfolio of stocks while simultaneously selling call options on those holdings. This strategy generates additional income from the option premiums, which are paid out to investors as distributions.
The trade-off? You give up some upside potential when markets rise sharply.
How It Works
When the ETF sells a call option, it receives an immediate premium payment. In exchange, the ETF agrees to sell the stock at a predetermined price (strike price) if it rises above that level.
- If stock stays flat or rises modestly: ETF keeps premium + stocks
- If stock rises significantly: Gains capped at strike price
- If stock falls: Premium provides some cushion, but losses still occur
Popular Covered Call ETFs in Canada
- ZWB (BMO Covered Call Canadian Banks) — High yield from bank stocks
- ZWC (BMO Canadian High Dividend Covered Call) — Diversified Canadian stocks
- HDIV (Hamilton Enhanced Multi-Sector Covered Call) — Multi-sector approach
- JEPI equivalent strategies — Various providers
The Pros
Higher Current Income
Covered call ETFs typically yield 6-10% or more, significantly higher than traditional dividend ETFs. This appeals to retirees needing income now.
Some Downside Protection
The option premiums provide a small buffer in declining markets, though they won't fully protect against significant drops.
Monthly Distributions
Most covered call ETFs pay monthly, providing regular income that aligns with typical expense schedules.
The Cons
⚠️ Important: Covered call ETFs underperform in bull markets. If stocks surge, your gains are capped while plain stock ETFs capture the full upside.
Reduced Long-Term Growth
Historically, covered call strategies have underperformed buy-and-hold over long periods because they cap gains during market rallies.
Tax Complexity
Distributions may include return of capital, which has different tax implications. Keep good records for tax time.
Higher Fees
MERs tend to be higher than simple index ETFs (often 0.65%+) due to the active option-writing strategy.
Who Should Consider Them?
💡 Note: Covered call ETFs may suit retirees prioritizing current income over long-term growth—especially those who won't need the money for 20+ years. They're not ideal as your only equity holding.
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About Maple Wealth Guide
Maple Wealth Guide is an independent Canadian financial education website. Our team of educational writers researches and explains investment concepts, retirement-related topics, and personal finance information for Canadians aged 50 and over. We are not licensed financial advisors and do not provide personalized recommendations. All content is for educational purposes only.