Best Covered Call ETFs in Canada 2023: Earn High Yields With Call Options

Covered calls are a fairly advanced options strategy used by traders to earn premiums from selling call option contracts.

A call option is a derivative contract that gives the option the right, but not the obligation, to purchase a stock at a certain price by a specific date.

The covered call strategy requires you to own at least 100 shares of a stock. You can then sell call options for the underlying stock to collect a premium from the contracts. Selling a call option means you are hoping that the price of the underlying stock remains below the strike price of the option.

They are called covered calls because if the price rises above the strike price, the buyer of the call option can exercise the contract. You would then have to sell that buyer your 100 shares at the strike price of the option.

Covered calls have proven to be an excellent way to produce additional income for your portfolio, especially if the strike price for the option is at the money.

What is a Covered Call ETF?

So, how can you apply covered calls to ETFs? Essentially, the ETF company will do all of the hard work for you.

All you need to do is buy shares of the covered call ETF, and you will reap the benefits of premiums paid out as quarterly or monthly distributions.

As mentioned above, the covered call options that are sold will yield a premium that is paid by the buyer. The ETF passes these premiums onto the shareholders of the fund. The ETF provider makes a profit off of the transaction and expense ratio fees.

Not every Canadian ETF provider will offer a covered call ETF option. BMO Global Asset Management and CI Global Asset Management both offer several options for Canadian investors.

In this article, I cover ten of my favourite Canadian covered call ETFs and why you should consider adding some to your portfolio.

Top Canadian Covered Call ETFs

BMO Covered Call Canadian Banks ETF (ZWB)

Here are some key facts for ZWB:

• Net Assets: $2.4 billion
• Distribution Yield: 5.31%
• Distribution Frequency: Monthly
• 52-week Price Range: $17.90 – $23.41
• 5-Year Annual Average Return: 6.40%
• MER: 0.71%

ZWB Is a BMO covered call ETF that sells covered calls against long positions in the major Canadian banks.

As its name suggests, ZWB holds stock positions in the major Canadian banks, including BMO, RBC, National Bank, Toronto Dominion, CIBC, and the Bank of Nova Scotia. It also holds a 24% allocation of the BMO Equal Weight Banks Index ETF (ZEB).

With a 5.31% monthly distribution yield, shareholders of ZWB can expect a monthly distribution of about $0.11 per share.

CI Energy Giants Covered Call ETF (NXF.TO)

Here are some key facts for NXF.TO:

• Net Assets: $497 million
• Distribution Yield: 8.34%
• Distribution Frequency: Quarterly
• 52-week Price Range: $4.15 – $7.13
• 5-Year Annual Average Return: 4.6%
• MER: 0.72%

NXF.TO is a covered call ETF from CI that sells covered calls on Canadian global energy stocks.

This ETF holds 15 of the largest energy companies in the world at equal weights of between 6-7% allocations.

It holds a diverse portfolio of stocks that are 45% from the US, 40% from the international market, and about 14% from Canadian companies. 

With an annualized distribution yield of 8.34%, shareholders will receive a quarterly distribution of about $0.13 per share.

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BMO Canadian High Dividend Covered Call ETF (ZWC)

Here are some key facts for ZWC:

• Net Assets: $1.49 billion
• Distribution Yield: 7.20%
• Distribution Frequency: Monthly
• 52-week Price Range: $17.12 – $20.40
• 5-Year Annual Average Return: 4.73%
• MER: 0.72%

ZWC is another covered call ETF from BMO that focuses on selling covered calls for 35 of the top dividend-paying stocks on the TSX.

The top holdings by weight in ZWC are Canadian National Railway Co (5.53%), Enbridge, Inc (5.25%), Manulife Financial Corp (5.00%), and Royal Bank of Canada (5.00%).

With an annualized distribution yield of 7.20%, shareholders of ZWC receive a monthly distribution of about $0.10 per share.

BMO Covered Call Technology ETF (ZWT)

Here are some key facts for ZWT:

• Net Assets: $33 million
• Distribution Yield: 6.08%
• Distribution Frequency: Monthly
• 52-week Price Range: $23.37 – $36.94
• 5-Year Annual Average Return: N/A
• MER: 0.73%

ZWT is a new covered call ETF from BMO that was established in January 2021. As its name suggests, it trades covered calls on tech stocks.

Geographically, the fund is weighted at 98.6% US stocks and 1.41% Canadian stocks.

The largest weighted stocks in ZWT are Apple Inc (8.41%), Microsoft Corp (7.67%), Alphabet Inc (7.16%), and Amazon.com Inc (6.83%).

This ETF offers an annualized distribution yield of 6.08% with a monthly distribution payment of about $0.13 per share.

Horizons Equal Weight Canadian Bank Covered Call ETF (HEF)

Here are some key facts for HEF:

• Net Assets: $16.4 million
• Distribution Yield: 5.35%
• Distribution Frequency: Monthly
• 52-week Price Range: $7.73 – $9.90
• 5-Year Annual Average Return: 3.92%
• MER: 0.84%

HEF is a Horizons covered call ETF that sells covered calls for big Canadian bank stocks.

The fund holds roughly equal weight to the six largest Canadian banks, which are Royal Bank, Toronto Dominion, National Bank, Bank of Montreal, CIBC, and the Bank of Nova Scotia. It also holds a 38.8% allocation to the Horizons Equal Weight Canada Banks Index ETF (HEWB).

With an annualized distribution yield of 5.35%, shareholders receive a monthly distribution of about $0.06 per share.

CI HealthCare Giants Covered Call ETF (FHI)

Here are some key facts for FHI:

• Net Assets: $56 million
• Distribution Yield: 8.66%
• Distribution Frequency: Quarterly
• 52-week Price Range: $10.93 – $12.77
• 5-Year Annual Average Return: N/A
• MER: 0.71%

FHI covers healthcare stocks from all over the world, although it has a 94% allocation to US equities.

Some of the largest weighted holdings in FHI include Pfizer (5.18%), UnitedHealth Group Inc (5.17%), AbbVie Inc (5.11%), and Humana Inc (5.06%).

With a generous annualized distribution yield of about 8.66%, shareholders receive a quarterly distribution for holding this ETF.

BMO US High Dividend Covered Call ETF (ZWH)

Here are some key facts for ZWH:

• Net Assets: $897 million
• Distribution Yield: 6.12%
• Distribution Frequency: Monthly
• 52-week Price Range: $19.84 – $23.90
• 5-Year Annual Average Return: 6.76%
• MER: 0.72%

ZWH is yet another BMO covered call ETF that tracks high-dividend paying US stocks.

This ETF holds some of the best dividend-paying stocks that trade on the US stock market. The highest weight allocations belong to Apple Inc (4.34%), Pfizer Inc (4.32%), Microsoft Corp (4.21%), and Home Depot Inc (4.14%).

With an annualized distribution yield of 6.12%, shareholders will receive a monthly distribution payment of about $0.11 per share.

CI Tech Giants Covered Call ETF (TXF)

Here are some key facts for TXF:

• Net Assets: $563 million
• Distribution Yield: 10.72%
• Distribution Frequency: Quarterly
• 52-week Price Range: $14.47 – $23.86
• 5-Year Annual Average Return: 9.7%
• MER: 0.71%

TXF is another covered call ETF offering from CI Global Asset Management. This ETF tracks some of the largest US-domiciled tech companies.

The largest weighted holdings of TXF include Qualcomm Inc (4.20%), ServiceNow Inc (4.18%), IBM Corp (4.16%), and Palo Alto Networks Inc (4.11%).

This ETF pays out an impressive annualized distribution yield of 10.72%, which means shareholders receive a quarterly distribution for holding this ETF.

Horizons Canadian Large Cap Equity Covered Call ETF (HEX)

Here are some key facts for HEX:

• Net Assets: $24 million
• Distribution Yield: 4.87%
• Distribution Frequency: Monthly
• 52-week Price Range: $6.17 – $7.74
• 5-Year Annual Average Return: 5.38%
• MER: 0.84%

HEX is another covered call ETF offering from Horizons. This ETF tracks the largest company in Canada by holding a 98.96% allocation to the S&P/TSX 60 index ETF (HXT).

This ETF allows Canadian investors to go long on the largest companies on the TSX while also earning monthly distribution payments.

With an annualized yield of 4.87%, shareholders receive a monthly payment of about $0.05 per share.

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Horizons NASDAQ-100 Covered Call ETF (HEJ)

Here are some key facts for HEJ:

• Net Assets: $9.47 million
• Distribution Yield: 4.91%
• Distribution Frequency: Monthly
• 52-week Price Range: $4.73 – $5.85
• 5-Year Annual Average Return: -0.73%
• MER: 0.84%

HEJ is a Horizons covered call ETF that sells covered calls for the NASDAQ-100 Index ETF (HXQ), which holds the largest American tech companies.

This ETF also holds minimal allocations to foreign companies like National Grid PLC ADR (0.17%), Mitsubishi UFJ Financial Group Inc ADR (0.09%), and TotalEnergeis SE ADR (0.06%).

With an annualized distribution yield of 4.91%, HEJ pays a monthly distribution of about $0.03 per share.

How to Buy Covered Call ETFs in Canada

The best part about buying covered call ETFs is that you don’t need to have options trading access for your account. Most brokerages in Canada require additional applications to trade options.

You can buy these ETFs using these discount brokerages:

Questrade

A favourite platform amongst Canadian investors, Questrade is the best discount brokerage in Canada.

Questrade allows investors to buy ETFs for free with just a minimal $4.95 charge to sell an ETF position.

Wealthsimple Trade

Wealthsimple is a no-trading-fee discount brokerage for Canadian investors who want to trade in stocks, ETFs, and even cryptocurrency.

Through the Wealthsimple Trade site, you can buy and sell ETFs for free with zero-commission trading fees.

Qtrade

Qtrade, a Vancouver-based discount brokerage, provides lower trading fees and a host of investment options for Canadian investors.

Looking to trade ETFs? Check out Qtrade’s list of free ETFs that you can buy and sell for no commission fees.

Are Covered Call ETFs a Good Investment?

It all depends on your investing goals, but generally, covered call ETFs can be a great source of cash flow to your account.

As you can tell from the price ranges of these ETFs, there is very little volatility in what is seen as a sound options trading strategy.

High distribution yields will be attractive for investors looking for income from their investments.

That said, you should decide on your own if covered call ETFs are right for your portfolio. This article is not meant to be financial advice but to introduce the world of covered call ETFs.

Pros and Cons of Covered Call ETFs

With little price volatility and high distribution yields, covered call ETFs are a great way to diversify your portfolio of assets.

Keep in mind if you are looking for high capital growth, these ETFs won’t increase in price. The monthly or quarterly distributions are meant to offset a lack of price growth. In this way, they act like fixed-income assets.

Over time, these distributions can compound, or you can re-allocate them to other assets like growth stocks.

It’s an excellent way to invest in options trading without actually trading options contracts.

Are Covered Call ETFs Safe?

Yes, covered call ETFs are safe, especially in a volatile market environment. Since these funds trade in a tight range, the regular income distributions can really help improve your cash position.

If you’re worried about stocks being volatile, then covered call ETFs are an excellent way to hedge against market instability.

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