Are covered call ETFs good?

Roughly two years ago, I wrote an article titled “Should I invest in high yield covered call ETFs?” It received many comments when it was first published and continues to be one of the most-read articles on the blog. From time to time, I get reader emails asking if I have changed my mind about covered call ETFs and whether it’s worth investing in covered call ETFs and get that extra juicy yield to accelerate your FIRE journey. 

I figured it’s worthwhile to revisit this topic and see if anything has changed since 2024. A lot has happened in the Canadian covered call ETF landscape in two years. New products have launched and the existing ones now have an additional two years of performance data. Furthermore, there has also been more academic research done on them since. 

If you haven’t read the original article or if you forgot the key points, please read it first (or again) so you understand how options work, the mechanics of writing calls, and the basic yield-vs-total-return trade-off. 

What’s new in the Canadian covered call ETF landscape

In my original article, I highlighted covered call ETFs like ZWB, FLI, TXF, HHL, and QYLD. Since then, many different covered call ETFs are now available to Canadian investors. Global X (formerly Horizons), Harvest, BMO, Royal Bank, and Hamilton have all launched new covered call ETFs. 

Some popular ones:

• BKCC – Global X Equal Weight Canadian Bank Covered Call ETF – aggressively writing covered calls on Canadian banks. Annualized distribution yield north of 10%.
• HMAX – Hamilton Canadian Financials Yield Maximizer ETF – similar to BKCC but targeting all the Canadian financial sectors (i.e. banks and insurance companies). A yield above 11%.
• UMAX – Hamilton Utilities Yield Maximizer ETF – focuses on Canadian and US utility stocks. Yield around 13%
• QMAX – Hamilton Technology Yield Maximizer ETF – focuses on IT companies like AMD, Micron, Apple. Yield around 10%.
• BANK – Evolve Canadian Banks and Lifecos Enhanced Yield Index Fund – this is similar to HMAX. 25% maximum leverage. Yield around 12%.

I also need to mention JEPI, JPMorgan Equity Premium Income ETF, which is an extremely popular high-yield ETF in the US with a yield around 8%. Not surprisingly, there are many similar high-yield Canadian equivalents like Hamilton Enhanced US Covered Call ETF (HYLD), Harvest Tech Achievers Growth & Income ETF (HTA), and Hamilton Enhanced Canadian Financial ETF (HFIN). 

You may also have heard of the YieldMax ETFs. These ETFs take the covered call ETF to the next level. The YMAX ETF, for example, has a 30-day SEC yield of over 90%!!

For those of you who are curious, Nelson and I quickly covered the YieldMax ETFs in DIY Wealth Canada Podcast Episode 6: Income Investing vs. Dividend Investing. We weren’t fans of these YieldMax funds and went so far as to declare them complete garbage…

Anyway, some of Global X, Harvest, BMO, Royal Bank, and Hamilton covered call ETFs use leverage and some don’t. Using leverage and cover calls create additional risk, so it’s important to read the ETF fund fact sheet to understand all the details before you pull the buy trigger.

Interestingly, the assets under management (AUM) in Canadian covered call ETFs has grown from around $15 billion two years ago to over $30 billion in 2026. That’s doubling in two years, which means that these covered call ETFs are getting increasingly popular despite many folks in the personal finance space and financial advisors being skeptical about them. 

Updated performance data

Let’s take a look at the performance data between low-cost index ETFs and covered call ETFs.

ETF	Type	MER	Yield	3 year annualized return	5 year annualized return
VCN	Broad Canadian Equity	0.06%	2.05%	23.42%	14.91%
VDY	Cdn dividend index	0.22%	3.04%	28.12%	18.56%
XAW	Global ex-Canada	0.22%	1.33%	21.85%	13.77%
ZEB	Cdn banks index	0.28%	2.26%	36.69%	20.84%
HDIV	Multi-sector covered call + 25% leverage	~1.90%*	9.84%	28.2%	19.5%
BKCC	Cdn banks covered call (no leverage)	0.49%	8.70%	23.98%	12.41%
HMAX	Cdn financial covered call (no leverage)	0.65%	11.14%	23.6%	n/a (launched Jan 2023)
UMAX	Utilities covered call (no leverage)	0.65%	13.44%	7.8%	n/a (launched Jan 2023)
QMAX	Tech covered call (no leverage)	0.65%	10.05%	n/a (launched Oct 2023)	n/a (launched Oct 2023)
BANK	Cdn banks + lifeco cover call + 25% leverage	0.60%	12.14%	35.68%	n/a (launched Feb 2022)
QYLD	NASDAQ 100 covered call	0.60	12.07%	14.39%	8.72%

* HDIV states 0% MER but is subject to the underlying ETFs. The ETF holds 10 different Hamilton ETFs. Based on my own calculation, the real MER is around 1.9%

For comparison, YMAX has an MER of 1.33% with a 12 month yield of around 69%. The fund is so new it only has a 1 year annualized return data (0.71%). Essentially you’re not getting any capital appreciation and any “returns” are in the form of monthly distributions. 

Back to the main topic… A few interesting things jumped out when I looked at the table above.

Since the covered call ETFs vary greatly, the best apples-to-apples comparison is probably ZEB vs. BKCC as both track the same Solactive Equal Weight Canadian Bank Index with BKCC overlays covered calls on roughly half of the portfolio. Over 3 years, ZEB has returned 36.69% annualized versus BKCC’s 23.98%. Over 5 years, it’s 20.84% versus 12.41%. The differences in performance are quite drastic. 

What does that mean in dollar amount? 

If you had invested $100,000 in ZEB and BKCC five years ago, this means you’d end up with around $238k for ZEB and $168k for BKCC. These numbers include distributions as well. So despite utilizing covered calls to generate a higher yield, BKCC actually ended up with a lower total return. 

I was surprised to see that HDIV has actually done “reasonably” well since its inception in July 2021 with a 19.5% return over five years. This performance is higher than the five-year return of VCN, VDY, and XAW. HDIV’s better five-year return was mostly driven by the 25% leverage and the strong Canadian equity market in the past five years. I quoted the word reasonably because if we compare HDIV, a leveraged ETF, to non-leveraged ETFs like VCN, VDY, and XAW, it’s not an apples-to-apples comparison. A good comparison is probably the Global X Enhanced S&P /TSX 600 Index ETF, CANL.

ETF	Type	MER	Yield	1 year annualized return
HDIV	Multi-sector covered call + 25% leverage	~1.90%*	9.84%	45.1%
CANL	S&P/TSX60 index + 25% leverage	1.40%	2.48%	39.14%

Comparing the 1-year annualized return, HDIV has done better than CANL, but we need longer-term data to do a fair comparison. 

Academic research on covered call ETFs 

Since I wrote the original article two years ago, there has been more academic research on them. As I mentioned before, there’s an inherent cost when you chase a higher yield and this has been indicated in these research reports. 

Rational Reminder Podcast, Episode 375 – Covered Calls: A Devil’s Bargain  – Ben Felix and Dan Bortolotti laid out academic evidence why covered calls are not great in the long run.

Israelov and Dong (2024) – the core paper the Rational Reminder Podcast referenced. Roni Israelov and David Dong published their research in the Journal of Alternative Investments. Israelov and Dong found that derivative income strategies, such as covered calls and put underwriting, do not deliver higher total returns. 

The authors demonstrated a strong negative mechanical relationship between expected total return and derivative income for the covered call strategy. In other words, covered call strategies have historically monetized what’s called the “volatility risk premium” – the tendency for options implied volatility to exceed subsequent realized volatility. When that premium is positive, covered calls capture a real edge. But when it’s not, covered calls essentially reduce your equity exposure and give up upside without getting adequate compensation.

Ben Felix summarized that covered call ETFs are more likely to hurt investors than help over the long term. When you look at the underlying math and numbers, it’s difficult to argue against that. This is probably why many of these high-yield covered call ETFs are often promoted by Finfluencers on YouTube and Twitter/X. What many people don’t realize is that more often than not, these “Finfluencers” get compensation from the fund companies for promoting these high MER covered call ETFs. 

You need to be careful out there!

Leverage – the double-edged sword

Leverage was one thing I didn’t really discuss in my original article. Take HDIV for example, the biggest risk with a leveraged covered call ETF isn’t the underlying ETFs, it’s the mechanics when the calls get exercised.

When markets are flat or rising steadily, leveraging 25%, or borrowing 25%, to buy more covered call ETFs juices your distribution yield and the total return. That’s the beauty of leveraging, you boost your returns. This is exactly why HDIV has done well since 2021. The ETF was launched into a leverage-friendly market and thanks to leverage, the fund has done well.

When the markets drop sharply, however, things work extra hard against you when you’re leveraging. A 30% drop when you are leveraging 25% means you would be down 37.5% instead. To make matters worse, because covered calls partially cap the upside on the way back up, you don’t fully recover the leveraged losses when the markets recover and start going up. In other words, this is an asymmetric risk that many DIY investors do not realize because all they see is the juicy +8% monthly yield on the fund page. 

The bear market we saw during COVID was extremely short compared to other bear markets we have encountered in the past. Since the COVID bear market, the bull has been running wild. It will be interesting if the next bear market is a prolonged one. If so, these leveraged covered call ETFs will truly get tested. 

What about taxes? 

I mentioned return of capital briefly in my original post, but I failed to break down how that would affect taxes. So it’s worth looking into the details.

If you hold these covered call ETFs inside TFSA, RRSP, RRIF, or FHSA, you don’t have to worry about the tax treatment on distributions because everything is sheltered in these registered accounts.

If you hold these covered call ETFs inside non-registered accounts, that’s a completely different story.

A cover call ETF’s distribution (and therefore its T3 slip) can have four different types of income: 

• Eligible Canadian dividends – best tax treatment, gross-up plus dividend tax credit
• Foreign income – no dividend tax credit, taxed as regular income at your marginal tax  rate
• Realized capital gain – 50% inclusion rate
• Return of capital – not taxed now but it reduces your adjusted cost basis

Now all return of capital is created equal, but there are two different “flavours” of ROC:

Constructive ROC – The fund generated real returns from option premiums and stock appreciation. For tax planning reasons, the fund distributes some back to the shareholders as ROC. This is essentially deferred capital gains and typically tax-efficient in the short run.

Destructive ROC – this is when the fund distributes more than it actually earned. In this case, the fund actually hands back a slice of your original investment and the net asset value (NAV) steadily goes down over time. You’re getting an “income” but in reality you’re just getting your money back.

The danger with some covered call ETFs is that the ROC in the distribution is destructive ROC. So your capital erodes over time due to the decreasing NAV. This also makes tax filing very complicated. 

For more in depth details, you can check out Return of Capital and How it Affects Adjusted Cost Base from Adjustedcostbase.ca and Generating Tax Efficient Cash Flows Using Covered Calls from Harvest ETFs.

My updated thoughts on covered call ETFs

I continue to believe these covered call ETFs aren’t for us. We prefer to invest in individual dividend stocks and low cost index ETFs. 

Having said that, I believe these covered call ETFs make sense for the right person. If a retiree is looking for more monthly income and wants a smoother monthly cash flow and he/she understands the total-return trade-off from these covered call ETFs, it might make sense. For example, in a down market, if you’re 70 and retired, rather than relying on selling shares to fund 100% of your retirement, it might make sense to allocate around 10% to BKCC and use the distributions as a defensive tool to avoid selling shares.

I’m still worried about the extremely high yield on many of these ETFs though. The dumpster fire garbage YieldMax ETFs aside, Hamilton’s Yield Maximizer ETFs are quite worrisome. The Yield Maximizers can only achieve such high yields by writing at-the-money or in-the-money calls, which caps upside almost entirely. So if you are buying HMAX for the extremely attractive 11% yield, set your expectations accordingly. You’re essentially buying a bond-like income stream backed by bank stocks. The upside potential of the underlying banks is largely written away, as you can see below: 

Another thing to consider is the high MER. Because they are actively managed ETFs, these covered call ETFs all have much higher MER’s than the broad market index ETFs (some over 10x). Some of these MERs I indicated above do not account for the cost of leverage, so the actual management fee may be much higher. 

When the funds are performing well and returning higher than the low-cost index ETFs, fine, it’s OK to pay higher fees. But having to pay higher fees when the market is not doing well, is a hard pill to swallow. 

As mentioned, we still do not own any covered call ETFs in our investment portfolio. I did consider nibbling on some a while ago just to boost our dividend income and to experiment. But every time I look at these covered call ETFs, my spidey sense just keeps going wild (I’m referencing Spiderman in case you’re curious). I would rather have our dividend income increase organically rather than through options premiums. More importantly, total return matters; it’s not just about the yearly dividend income amount. 

Summary – covered call ETFs when you should and shouldn’t have them

Do covered call ETFs make sense in your investment portfolio? Just like many things in personal finance, it’s not a yes or no answer. It depends on many factors. 

Covered call ETFs make sense if:

• You’re retired and you prioritize a steady and smooth cash flow over long-term compounding
• You have a specific gap in your income needs and want a targeted allocation for the covered call ETFs (i.e. covered call ETFs are not a core holding)
• You understand and accept the tax complexity in non-registered accounts
• You use covered call ETFs like a bond-like alternative
• You’re only looking at yield and not total return (note: this is the wrong approach!)

Covered call ETFs don’t make sense if:

• You’re in the accumulation phase and still decades from FIRE
• You’re planning to have a large percentage of covered call ETFs in your portfolio
• You don’t understand the downsides of leverage
• You’re trying to get more income only to accelerate your FIRE timeline

Don’t get me wrong, there’s definitely a market need for covered call ETFs. They are a specific tool created for a specific job. The problem is that many investors only look at the yield and fall into the yield trap.  

As I said in my original article and what I said above – total return matters. Do not just look at yield alone. Over the long run, it’s important to look at a combination of yield and capital appreciation.

Therefore, do your homework! If you plan to utilize covered call ETFs to make up cash flow shortfall, size your position accordingly and appropriately. Furthermore, just because you’re getting a monthly deposit in your account, doesn’t mean you should ignore what’s happening to the fund’s NAV. 

For those of you that have bought covered call ETFs, what has your experience been? Did the monthly income deliver what you expected? How did you feel about NAV movement during the 2025 volatility? For those of you who were against covered call ETFs but ended up buying some, what made you change your mind? I’d love to hear from you.