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BMO Canadian High Dividend Covered Call ETF (ZWC $19.58)
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NEOS Nasdaq 100 High Income ETF (QQQI $55.34)
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NEOS S&P 500 High Income ETF (SPYI $52.70)
I have been trying the understand the pros and cons of covered calls and options ETFs by looking at previous questions on the subject. I spent considerable time on the matter and I am more confused than ever.
Would you be kind enough to summarize your views on the matter and, if you are really positive about it, please provide a list of the best ETFs suitable for a strong growth investor.
Gratefully,
Jacques IDS
Covered call ETFs offer reliable income and lower volatility, but they restrict upside gains and may underperform in strong markets or rapid rebounds. The main pros are:
Enhanced income: Selling call options generates option premiums, boosting overall yield beyond dividends from the underlying stocks.
Reduced volatility: These ETFs typically have lower price swings compared to direct equity holdings, beneficial in choppy or sideways markets.
Accessible strategy: Covered call ETFs simplify the options process, making it easy for investors to earn income without managing complex trades.
Tax efficiency: Option premiums may be taxed as capital gains or return of capital, which can be more favorable than interest income.
The main cons are:
Limited upside: Gains are capped because the ETF must deliver shares or settle in cash if the market rises past the call strike price, so large rallies result in missed appreciation.
Less recovery potential: After market drops and subsequent rebounds, these ETFs may lag underlying asset recovery, since new call options continue capping upside.
Not ideal for bull markets: Covered call ETFs tend to underperform during strong rallies when stocks steadily surpass call strike prices.
Higher costs: Actively managed covered call ETFs often have higher management fees than passive funds.
No true downside protection: While premiums buffer losses, these ETFs still incur significant declines in major downturns, lacking real hedging against big drops.
We consider them OK. For investors that absolutely want higher income, they do the job. But over the long term 'straight' equity funds are likely going to outperform. There are also some enhanced funds that use leverage, and conservative investors may get sucked in by high yields and mis-read the risk of leverage.
We think QQQI and SPYI are two of the best. There are many sector-specific funds, but we would prefer a diversified offering. In Canada, ZWC has a five-year annualized return of 12.54%.