Covered Call ETFs in Canada: Good for Retirees?

A reader suggested I write an article on covered call ETFs. This reader is retired and has about 10% of their portfolio in ZWG (BMO Global High Dividend Covered CalL ETF), ZWP (BMO Europe High Dividend Covered Call ETF), and ZWE (BMO Europe High Dividend Covered Call ETF) all of which pay around 6-7% dividend. This reader also has had some capital appreciation even though it is not more than equities in terms of ‘total return’. Here’s a guide on covered call ETFs in Canada and whether they deserve a place in your investment portfolio as a retiree.

For those that favour growth over portfolio income (e.g. index investors vs dividend investors), Covered Call ETFs will probably make those investors feel even more distaste, probably.

This post will go over what a covered call ETF is, what are some of the benefits and drawbacks to Covered Call ETFs, and will go over some of the providers of Covered Call ETFs in Canada, and review some of the more popular Covered Call ETFs like ZWB. Finally this post will look at whether these ETFs deserve a place in your investment or retirement portfolio.

What is a Covered Call ETF?

Covered Call ETFs were available on the Canadian market since about 2011. Currently there are 70 Covered Call ETFs available with assets under management of $10 billion.

First it would be helpful to explain what a covered call ETF is. An ETF stands for exchange traded fund. Unlike many other ETFs, a covered call ETF is actively managed. The fund manager buys equities and writes call options to investors.

Writing covered calls means that as an investor who owns the hypothetical equity with ticker symbol AAA, you can write a contract giving a buyer an option to buy your shares of AAA at a certain price for a limited period of time.

The option lets the investor buy a fund’s individual holdings at a later date for a strike price (a specific price). The options writer (you) gets paid a premium to provide that option to the potential investor.

In return for income, the individual gives away capital appreciation above the strike price. It doesn’t matter how the stock price performs, the premium is still kept regardless of stock price performance, the fund keeps the premium income, which it pays out to increase the fund’s yield.

Covered Call ETFs hold the same equities that the regular ETF counterpart would have, except that the fund manages to sell call options and write premiums on these equities within the ETF.

If you have wanted to learn how to write call options but found it too difficult to learn how (or don’t have the time to do this), you could invest in a covered call ETF instead and let the fund managers do the work for you for a management fee.

For more information, you can see Liquid Independence’s Youtube video on how to do options trading and he plans to earn $1000 a month on options trading.

Now that we learned a bit about what covered calls are and how they may benefit you as an investor, here are some benefits and drawbacks to Covered Call ETFs in Canada.

Pros of Covered call ETFs

Less Time Consuming Than Writing Options Yourself

Some of the benefits of Covered Call ETFs include saving time (as a retiree you may not have that much time because you are too busy enjoying life away from the 9-5) because you don’t have to manage individual option positions.

High Distribution Yield

It can result in additional income for your portfolio compared to bonds or preferred shares or other fixed income type investments. The yield on Covered Call ETFs is higher than ETFs that hold the same investments/ companies.

Monthly Income

This income for covered call ETFs in Canada is usually paid on monthly basis, which many investors who want income (like retirees) would find attractive.

Outperforms In Flat or Bear Markets

During sideways markets or bear markets, Covered Call ETFs are expected to perform better than the market.

Better Tax Implications

Finally there are tax implications of covered calls. Covered Call ETFs are considered tax advantageous compared to dividends. The distributions that your receive from your Covered Call ETF are mainly considered capital gains from the premiums received rather than strictly distributions and dividends. The capital gains from the premiums makes it more tax efficient.

Related: How are dividends taxed in Canada?

Cons of Covered Call ETFs

Here are some of the negative aspects of Covered Call ETFs and why many people aren’t a fan of them.

Higher fees

One of the main downsides of Covered Call ETFs is that they are actively managed, and active management means higher fees.

The typical Covered Call ETF fee is anywhere from 0.60% to 0.85%. Sure this is much lower that a typical mutual fund fee of 2.25%, on $100,000 invested with Covered Call ETFs at a 0.65% fee, that works out to be about $650 a year.

This is a high fee for an ETF, typically ETF fees can be as low as 0.05% or can be something like 0.25% for an all in one ETF like VGRO.

Underperforms in certain market conditions

Also, another negative is that during strong bull markets, Covered Call ETFs are expected to underperform. They work best in sideways to slightly rising markets.

It would work best with equities that are within the Covered Call ETF that are not considered to be volatile.

Less Growth

Okay now onto the meat and potatoes of why Covered Call ETFs get less glowing reputation. Let’s look at ZWB the BMO Covered Call Canadian Bank ETF. As we all know, Canadian banks have been on fire for the past 12 months as of August 2021.

If you look at total return, you can see that ZWB has not performed as well compared to owning something like ZEB which is the BMO Equal Weight Canadian Bank ETF (which recently reduced their MER to 0.25% from 0.60%), or even if you owned individual BMO shares directly.

This is graph is from Wealthica, a free portfolio tracker that I use on a daily basis. It is a Power Up called Portfolio Performance.

Here are the 12 month total return for owning BMO, ZEB, and ZWB compared:

  • 12 month return for owning BMO directly 65% (yes, wow!)
  • 12 month return for owning ZEB (BMO Equal Weight Canadian Bank ETF) 46%
  • 12 month return for owning ZWB (BMO Covered Call Canadian Bank ETF) 33%
BMO Canadian Bank Covered Call ETF

This post may contain affiliate links. Please see’s disclaimer for more information.

Even though ZWB pales in comparison, I wouldn’t complain about a 33% return on investment in general though, especially if you get monthly income.

Related: Dividend Predictor App Review

Providers of Covered Call ETFs

There are a number of providers of Covered Call ETFs in Canada.

Here are some of the Covered Call ETF providers in Canada, according to Wikipedia:

  • Horizons Covered Call ETFs
  • BMO Asset Management (they have a few covered call ETFs such as: ZWE, ZWA, ZWB, ZWH, ZWU, ZWK)
  • First Asset Covered Call ETFs– CI Financial Corporation (they have a few covered call ETFs NXF: CI First Asset Energy Giants Covered Call ETF and NXF.B: CI First Asset Energy Giants Covered Call ETFs are more popular)
  • Hamilton ETFs (they have a Multi Sector Covered Call ETF which holds a number of other covered call ETFs)

One of the more popular one (with the most dollars in assets under management) is the Bank of Montreal Covered Call ETFs and of those, ZWB and ZWC are the most popular.

Here’s a closer look at some of the Covered Call ETFs from Bank of Montreal Global Asset Management.

BMO Covered Call Canadian Banks ETFs (ZWB)

The allure of regular monthly income is so intoxicating that many people prefer the BMO Covered Call Canadian Banks ETF compared to just owning the Canadian banks.

The Covered Call Canadian Banks ETF has underperformed the Canadian Banks for the past decade (well except for BNS, ha).

See for yourself in this chart from Yahoo Finance dating back to 2011. The pink with 173% is NA (National Bank), the Purple and light blue is TD and BMO with around 120% return and the blue colour at the bottom with 36% is ZWB, the BMO Covered Call Canadian Banks ETF.

Let’s have a closer look at one of the more popular Covered Call ETFs in Canada, ZWB, which has been around since 2011.

The ticker symbol is ZWB for the BMO Covered Call Canadian Banks ETF.

The annualized distribution as of August 6 2021 was 5.74%.

The management expense ratio is 0.72% and the annual management fee is 0.65%. It is managed by BMO Global Asset Management. Investing in ZWB is considered a ‘medium risk’ venture.

Assets under management for ZWB is $2.3 billion.

The top holdings of ZWB are:

  • ZEB BMO Equal Weights Bank ETF (27%)
  • CIBC (13%)
  • BMO (13%)
  • RBC (12%)
  • NA (12%)
  • TD (11%)
  • BNS (11%)

If you invested $100,000 in ZWB you would receive 5.72% annually which is around $476 a month and these would mostly be considered capital gains largely, so approximately $238 would be taxed at your marginal rate.

Related: The Best Canadian Dividend Stocks to Buy and Hold

BMO Canadian High Dividend Covered call ETF (ZWC)

Another popular Covered Call ETF in Canada is also from BMO, and this is the BMO Canadian High Dividend Covered Call ETF, with ticker symbol ZWC.

ZWC has been available as an ETF on the TSX since 2017.

The annualized distribution yield for ZWC is 6.51%.

The management expense ratio is 0.72% and the annual management fee is 0.65%. It is managed by BMO Global Asset Management. Investing in ZWC is considered a ‘medium risk’ venture.

There are 89 holdings within the ZWC ETF. The top holdings of ZWC with approximate percentages are:

  • CIBC (5%)
  • BCE (5%)
  • RBC (5%)
  • Telus (5%)
  • Canadian National Railway (5%)
  • Enbridge (5%)
  • BNS (4.8%)
  • TD Bank (4.8%)
  • Manulife (4.4%)
  • Nutrien (4%)

Since inception in 2017, the annualized performance is 4.92% and cumulative performance is 23% as of August 2021.

Richard Croft, of R.N. Croft Financial Group (portfolio management company in Canada) talks to BNN Bloomberg about whether ZWC would be a good purchase for the next year here.

Covered Call ETFs in Canada: The Verdict

So, what’s the verdict on Covered Call ETFs in Canada?

I can see why there is such an allure towards income especially for someone who is retired. When you switch from the asset accumulation stage to the withdrawing of your portfolio stage, I can see why income is more important than growth.

Essentially, I don’t think Covered Call ETFs are all that bad, I can see why these are attractive especially if you have a small percentage of your portfolio invested with Covered Call ETFs and you don’t want to ‘prune your own investment portfolio’ for capital gains. I certainly wouldn’t dump 100% of your portfolio in retirement in this, that’s for sure!

You don’t want to put all your eggs in one retirement basket.

If you are looking for dependable higher yields, and are well aware that you are leaving behind growth and unrealized capital gains, then these may be right for your portfolio.

If you are in the asset accumulation phase, focusing on dividend growth investing or focusing on growth rather than Covered Call ETFs is probably a better bet for you.

Hope you found this helpful, please share your comments below on your thoughts and opinions on Covered Call ETFs.

You may also be interested in:

Do you have Canadian Covered Call ETFs in your portfolio?

What are your thoughts on them?

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11 thoughts on “Covered Call ETFs in Canada: Good for Retirees?”

  1. It’s interesting how there aren’t that many companies offering covered call ETFs. I would like to see either Vanguard or iShares selections. More competition would lower the overall fees for these types of funds.

    I own ZWU from BMO right now. It’s a slow and steady increase with minimum risk. Works particularly well in down markets, but certainly underperformed the broad index over the last couple of years lol.

    Thanks for mentioning my video. 🙂 Covered calls and other options strategies can add a lot of flexibility to one’s portfolio.

  2. A very instructive and well written article. Particularly liked the emphasis on it being a part of the “withdrawing” phase rather than the “accumulating” phase and that you wouldn’t put 100% of your portfolio into them. Agree with the comments above regarding fees which we would all like to see a little lower.

    • @VLW- Thanks VLW! The accumulating phase is fun but very few people talk about the withdrawing phase. I guess those who are “FIRED” are too busy enjoying life to talk about money.

  3. I appreciate your thoughts on this. Covered call ETFs is a strategy I’m strongly considering once retirement comes, but I am a little leery of their long term performance.

  4. I am a Retiree and I have been selling Covered Calls for a few years now. I primarily use them in my TFSA account, where I do not have to be concerned about any Capital Gains Tax issues. Yes, I would have made more money if I had road things out with the base security instead. However, the added security (for some decreases in prices) they provide is worth it, in my mind. It does take some work to keep on top of “Exercise/Call Dates” – I am still trying to determine the “optimum rule of thumb” in arriving at a suitable Premium Price versus the duration of the call. Here is a link explaining the Selling Covered Call Strategy.

    • @Malcom- Congrats on retirement! Good idea to put them in your TFSA, thanks for sharing. Thanks for sharing the covered call strategy, another thing to try on my list of ‘to dos’ once I have more time 🙂


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