Discover the Best Canadian Covered Call ETFs for 2024

In the world of Canadian ETFs, covered call strategies have gained significant traction among investors seeking steady income. These innovative financial instruments blend the stability of dividend stocks with the income-boosting potential of option writing. As we look ahead to 2024, many investors are on the hunt for the best covered call ETFs to enhance their portfolios and generate reliable cash flow in an ever-changing market landscape.

This comprehensive guide delves into the top Canadian covered call ETFs poised for success in 2024. It explores sector-specific options, examines international exposure opportunities, and provides insights on evaluating ETF performance. Additionally, it offers valuable tips on building a well-rounded portfolio using these income-generating tools. Whether you’re a seasoned investor or new to the world of covered call strategies, this article aims to equip you with the knowledge to make informed decisions in the Canadian ETF market.

Top Canadian Covered Call ETFs for Income Generation

Covered call ETFs have gained popularity among Canadian investors seeking high-yielding investments ^[1]. These financial instruments combine dividend stocks with option writing to enhance income potential. Let’s explore some of the top Canadian covered call ETFs for income generation.

BMO Covered Call Canadian Banks ETF (ZWB)

The BMO Covered Call Canadian Banks ETF (ZWB) offers exposure to a basket of Canadian banks while implementing a covered call strategy ^[2]. This ETF provides investors with both the yield from bank stocks and additional income from option premiums. With a distribution yield of approximately 7.5%, ZWB presents an attractive income stream for investors ^[2].

ZWB is particularly suitable for those who need regular income and want exposure to the Canadian banking sector. However, it’s important to note that the covered call strategy may limit potential capital gains in strongly bullish markets ^[2].

BMO Canadian High Dividend Covered Call ETF (ZWC)

While specific details about ZWC are not provided in the given information, it’s worth mentioning as another option in BMO’s lineup of covered call ETFs. This fund likely focuses on high-dividend Canadian stocks across various sectors, employing a covered call strategy to enhance yield.

CI Energy Giants Covered Call ETF (NXF.B)

The CI Energy Giants Covered Call ETF (NXF.B) focuses on the energy sector, offering investors exposure to major energy companies while implementing a covered call strategy. As of the latest data, NXF.B had a yield of 7.72% and a year-to-date daily total return of 9.49% ^[3].

NXF.B’s top holdings include major energy companies such as Suncor Energy, Eni S.p.A., and Exxon Mobil Corporation ^[3]. The fund’s sector weighting is 100% in energy, making it a specialized option for investors bullish on the energy sector ^[3].

When considering covered call ETFs, investors should be aware that while they offer attractive yields, they may underperform in strongly bullish markets due to the capped upside potential ^[1]. Additionally, the tax implications of these ETFs should be considered, as their distributions often include a mix of dividends, capital gains, and return of capital ^[1].

Sector-Specific Covered Call ETFs

Sector-specific covered call ETFs offer investors targeted exposure to particular industries while generating income through option writing strategies. These ETFs can be valuable tools for investors seeking to capitalize on specific sector trends or diversify their portfolios.

Technology Sector: BMO Covered Call Technology ETF (ZWT)

The BMO Covered Call Technology ETF (ZWT) provides exposure to the technology sector while implementing a covered call strategy to enhance income. This ETF aims to benefit from the growth potential of tech stocks while generating additional income through option premiums. The technology sector has shown promising growth prospects, particularly in large-cap tech stocks and the emerging artificial intelligence (AI) boom ^[4].

Healthcare Sector: CI Health Care Giants Covered Call ETF (FHI)

The CI Health Care Giants Covered Call ETF (FHI) focuses on the healthcare sector, offering investors exposure to major healthcare companies while employing a covered call strategy. FHI’s investment objectives include providing regular cash distributions, capital appreciation potential, and lower overall volatility compared to directly owning the underlying securities ^[5].

FHI invests in an equal-weight portfolio of equity securities of at least the 20 largest healthcare companies by market capitalization listed on North American stock exchanges. The portfolio manager may adjust the issuers included based on liquidity considerations of their equity securities and related call options ^[5].

Both ZWT and FHI allow investors to capture sector-specific opportunities while potentially benefiting from the income-generating aspects of covered call strategies. However, it’s important to note that these ETFs may limit upside potential in strongly bullish markets due to their covered call approach.

International Exposure Through Covered Call ETFs

For investors seeking global diversification and income, international covered call ETFs offer an attractive option. These funds provide exposure to foreign markets while employing option-writing strategies to generate additional income.

BMO Europe High Dividend Covered Call ETF (ZWP)

The BMO Europe High Dividend Covered Call ETF (ZWP) focuses on European equities, offering investors exposure to the region’s large and mid-cap securities. This ETF implements a dynamic covered call option writing program to mitigate downside risk and generate income ^[6]. ZWP aims to provide monthly distributions of dividend and call option income, making it an attractive choice for income-oriented investors looking for European market exposure.

Global Diversification Benefits

International covered call ETFs offer several advantages for portfolio diversification:

1. Exposure to different markets: Funds like the Global X MSCI EAFE Covered Call ETF (EACC) provide access to developed markets across Europe, Australasia, and the Far East ^[6].
2. Emerging market opportunities: The Global X MSCI Emerging Markets Covered Call ETF (EMCC) offers exposure to large and mid-cap securities in emerging markets ^[6].
3. Potential for higher yields: These ETFs often generate higher income compared to traditional equity funds due to their option-writing strategies ^[7].
4. Risk mitigation: The covered call strategy can help offset potential losses during market downturns ^[8].

Investors should note that while these ETFs offer attractive yields, they may underperform in strongly bullish markets due to capped upside potential ^[1].

List of Canadian Covered Call ETFs

Evaluating Covered Call ETF Performance

Total Return vs. Income Generation

Covered call ETFs aim to generate higher income by investing in stocks while selling call options on a portion of the underlying securities ^[9]. This strategy provides a steady income stream through option premiums and dividends, making them attractive for income-oriented investors ^[9]. However, it’s crucial to consider the trade-off between income and growth potential ^[9]. While these ETFs can enhance total return through option premiums, they may cap potential capital appreciation in strongly bullish markets ^[9].

Volatility and Downside Protection

Covered call strategies are often considered defensive, as the option premium can help mitigate downside risk in falling markets ^[9]. This approach can reduce some of the volatility associated with stock ownership, providing a cushion against potential stock price declines ^[9]. During periods of elevated volatility, active management using options writing strategies has the potential to improve risk-adjusted returns ^[10].

Long-Term Growth Potential

While covered call ETFs offer attractive yields, they may underperform in powerful bull markets ^[10]. The strategy limits upside potential as stocks may be called away when prices rise significantly above the strike price ^[9]. However, some upside participation is still possible along with income earned from premiums ^[10]. Investors should carefully consider their long-term growth objectives when evaluating these ETFs as part of their portfolio strategy.

Building a Diversified Portfolio with Covered Call ETFs

Asset Allocation Strategies

Covered call ETFs offer a unique approach to portfolio diversification. These ETFs balance cash flow generation and market participation by selling out-of-the-money call options on approximately 50% of the portfolio ^[11]. This strategy allows investors to capture modest growth while generating income from two sources: regular dividends and option premiums ^[12].

Balancing Income and Growth

Harvest ETFs employs different strategies for various ETF types to optimize income and growth potential:

1. Equity Income ETFs: Cap call option sales at 33% of holdings ^[13].
2. Fixed Income ETFs: Utilize up to 100% for higher premiums and reduced volatility ^[13].
3. Balanced Income ETFs: Invest a minimum of 75% in ETFs that write covered calls ^[13].

This approach aims to provide consistent monthly income while maintaining exposure to market growth ^[13].

Rebalancing Considerations

Actively managed covered call strategies offer flexibility in option writing, allowing for adjustments based on market conditions ^[13]. During periods of high volatility, managers may sell options further out-of-the-money, while in low volatility environments, they may write options closer to the current stock price ^[11]. Regular rebalancing helps maintain the desired balance between income generation and growth potential.

Conclusion

Canadian covered call ETFs offer a unique blend of income generation and market participation, making them an attractive option for investors seeking steady cash flow. These funds provide exposure to various sectors and international markets while employing option-writing strategies to enhance yields and potentially mitigate downside risk. As we look ahead to 2024, ETFs like BMO Covered Call Canadian Banks ETF (ZWB), CI Energy Giants Covered Call ETF (NXF.B), and BMO Europe High Dividend Covered Call ETF (ZWP) stand out as promising options for income-focused portfolios.

To wrap up, investors should carefully weigh the trade-offs between income and growth potential when considering covered call ETFs. While these funds can provide attractive yields and some downside protection, they may underperform in strongly bullish markets due to capped upside potential. By thoughtfully incorporating covered call ETFs into a diversified portfolio, investors can strike a balance between steady income and long-term growth objectives, potentially enhancing their overall investment strategy.

FAQs

1. Which ETFs should you consider investing in for 2024?
For 2024, it’s advisable to look into ETFs that align with your investment goals and market trends. Specific recommendations may vary, so consulting financial forecasts and expert analyzes closer to that time can provide more precise guidance.

2. Which covered call ETF is considered the best?
The best covered call ETF can vary based on current market conditions and specific investment strategies. It’s recommended to review recent performance data and expert opinions to identify the top choice that suits your investment needs.

3. What is the current top ETF choice in Canada?
The best ETF to invest in Canada at the moment will depend on various factors including market performance, sector growth, and economic conditions. It’s wise to consult the latest market analyzes and investment advice to make an informed decision.

4. Which ETFs have shown the best performance over the past five years?
Identifying the best-performing ETFs over the last five years involves examining historical data. ETFs that consistently show strong returns and stability are generally favored. Specific fund performance can be checked through financial services or investment platforms that track ETF histories.

References

[1] – https://www.moneysense.ca/save/investing/etfs/what-are-covered-call-etfs-and-are-they-good-investments/
[2] – https://stockchase.com/company/view/3970/ZWB-T
[3] – https://finance.yahoo.com/quote/NXF-B.TO/
[4] – https://www.bmo.com/assets/pdfs/gam/etf/en/SA_MRFP_ZWT_E.pdf
[5] – https://funds.cifinancial.com/en/funds/ETFS/CIHealthCareGiantsCoveredCallETF.html?currencySelector=4&seriesId=14176
[6] – https://www.globalx.ca/news/press-releases/global-x-expands-canadas-largest-covered-call-enhanced-etf-suites-with-u-s-international-and-fixed-income-strategies
[7] – https://harvestportfolios.com/common-benefits-of-covered-call-etfs/
[8] – https://www.investopedia.com/covered-call-etfs-7975323
[9] – https://www.reddit.com/r/CanadianInvestor/comments/1cefw3s/what_are_canadians_thoughts_on_covered_call_etfs/
[10] – https://www.youtube.com/watch?v=qkeXgH7x0IU
[11] – https://www.bmoetfs.ca/articles/covered-call-option-strategy-enhanced-income-with-covered-calls
[12] – https://www.bmogam.com/ca-en/products/exchange-traded-funds/covered-call-etfs/
[13] – https://harvestportfolios.com/covered-call-option-etfs/