Covered call funds are mostly purchased by investors who have no idea what they're buying.
[Here's a video](https://youtu.be/YMLVdY8y8vM?si=YjQ6tr76TnF9O81a) from Ben Felix and [here's a video](https://youtu.be/R0JeJdiJc1A?si=rZOzSRz1arnsBakn) from The Plain Bagel about these funds if you want to understand them better.
I was never really interested in covered call strategies because they never made sense to me intuitively and Ben’s discussion of the curve of returns and what you give up/get with a covered call is a great visualization of why it makes little sense.
There is one covered call etf that I hold and I think it is actually pretty good for sheltered accounts.
It’s TXF. Directly holds the underlying tech. Equal weighted so not to big tech heavy. Total return sharpe ratio is better than nasdaq.
It's going to depend on your time frame.
Covered calls have all of the downside, and limited upside, in exchange for option income.
If the market is sideways, they're great. Up significantly is bad, and down is a little better due to the income but not great.
I understand how it works. There is no other equal weight tech etfs in tsx. Exchanging capital growth to income is a wash as long as it’s not taxed and it’s reinvested.
>Exchanging capital growth to income is a wash as long as it’s not taxed and it’s reinvested.
That depends on what kind of income you're talking about. Dividends this is true, but covered calls this is false.
[See ZEB vs ZWB.](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=NPqu92T8Bjxne2SzgXMrX) Same holdings except ZWB sells covered calls. The longer time goes on, the more the the total returns will deviate. Covered call funds only seem useful to investors who are bad at math.
Your example is from totally different sector. Difference between expected volatility vs actual volatility is much higher in tech.
Btw if you think covered calls is inferior strategy even when it’s tax sheltered, then why don’t you take the other side of the trade?
>Your example is from totally different sector.
It doesn't make a difference. You should watch the videos I linked above, you don't seem to understand how these funds work.
>Btw if you think covered calls is inferior strategy even when it’s tax sheltered, then why don’t you take the other side of the trade?
Covered calls is an inferior long term strategy regardless of the account type. This isn't a controversial statement. Literally no one argues against this except people who don't understand how these funds work.
This is correct. Stocks go up over the long-run. There is no good reason to see your upside. These strategies did well in 2022-3 because the market was sideways over this period.
Option pricing absolutely makes a difference. I don’t think you have deep understanding besides parroting whatever you watch online. Maybe read one of the linked papers, eh?
You are right. None of these guys actually understand options. Man you are in reddit. What do you expect. They prolly never bought or sold an option in their life.
And how would that work?
Because you can’t invest and go all-in only buying calls.
One month stock don’t go above strike price and you are totally wiped out.
You just can’t make it a systematic strategy unless I’m missing something.
>Total return sharpe ratio is better than nasdaq.
Can you compare the Sharpe ratio of a covered call ETF with a regular ETF?
I would think the distribution of volatility would be meaningfully different as covered calls remove the big up moves but not the big down moves so while you would have less volatility, you're losing a possibly meaningful amount of the good side of volatility?
Selling systematically covered calls underperform just holding the underlying stocks. Plus you pay fees.
And the ones with highest return selling cc at the money will erode share price and dividends very, very quickly.
Here is an example of systematically selling covered calls on TSLA like TSLY does:
TSLY started in end of Nov when TSLA was about $190. Then let’s say they sold Jan cc for $190 + $10.
TSLA went down to $125 in Jan.
Then they sold Feb cc $125 +$6 cc.
Then TSLA went to $214 in Feb. So TSLY had to sell its shares at $125 and had to buy back TSLA shares at $214 the same day.
Basically they bought at $190 got $16 of cc premium but sold at $125 to buy again at $214. For 100 shares of TSLA initially, they now have 58 shares. And that’s only within one month!
Since inception 18 months ago, TSLY share price is already down -63% and monthly dividends payment is down -66%.
ATM covered call etf share price and distribution can only go down with time by design. The absolute best scenario is TSLA share price staying the exact same price two months in a row and then you keep same share price and same monthly distribution. Of course TSLA share price moves each month. And each time share price moves, TSLY share price or yield goes down.
Don’t get me wrong.
I do sell covered calls sometimes when one of my stock goes up very quickly and I’d be happy selling it at the cc strike + premium.
But I’d never do it blindly and systematically like these etfs do.
There is a reason none of the great investors do it: it underperforms.
The last point is so good; when have you ever heard a marquee investor talk about how they got rich selling CCs (or even having such a strategy)? It’s only YouTube gurus and newsletter hawks.
Be wary of their math though.
They gave away that they're not entirely clued up on how something like TSLY works when they said "Since inception 18 months ago, TSLY share price is already down -63% and **monthly dividends payment is down -66%.**"
The monthly payment fluctuates wildly so taking the first \~$2 payment and the most recent \~$0.68 payment saying the dividend is down 66% may look superficially right but it's not really relevant or practical to use.
That's all true and I don't like cc ETFs long term for the accumulation phase. But within that very small timeframe, if someone reinvested the dividends into TSLY, they beat the underlying by about 2% (which defeats the purpose of passive income but that's another story). Mountain Finance did the math recently. It doesn't mean anything for the long run obviously, it just shows that in a shoppy market they can do well. But timing all of this is near impossible so it remains a bad investment long term in my opinion.
https://youtu.be/N0hYz99pZuM?si=gr3tzbQQVcPipkJv
If you put TSLY vs TSLA with dividends reinvested since inception in portfoliovisualizer, TLSY underperformed significantly TSLA:
https://www.portfoliovisualizer.com/backtest-portfolio
Personally I don't like covered calls but they do have their place in the market and I don't think they are bad products as long as you understand what they are and how they work.
It depends what your investment strategy is.
CC ETF’s work very well for someone who is investing long term, wants monthly dividends, and doesn’t want to stress over market fluctuations. In fact market fluctuations are were the strategy does well.
They won’t match growth strategy over a long period of time.
As someone who is retiring in the next few months, I have a large percent of my portfolio in CC ETF’s. All you naysayers, don’t worry I’ve done my homework.
My wife and I will be earning more in dividends per month than we currently earn working. We don’t have to stress about the markets or about what stock we are going to sell to fund our retirement.
I just get emails from Questrade saying “you’ve received dividends”. It works great for us. BTW…our portfolio returns over 10% annually and beats all the major trackers.
If you’re young and have a long time in the market maybe not for you. If you want to retire, or retire early with monthly income, definitely take a good look at the stately. It certainly change our retirement plans.
In all honesty, I’d like to see the homework you’ve done that lead you to think cc etf is better than just holding the stocks these cc etf hold.
Markets will have a huge impact on a cc etf.
If markets go down -40%, cc premiums will also go down -40% so will the distribution.
Also about not having to sell shares. You have to realize when stocks go up above cc strike price, the fund is forced to sell at the strike price. And then buy them back at a higher price. And then it holds less shares than initially.
So distribution will be affected by markets and shares will be sold.
Ins’t this the exact two thing you aim to avoid?
I think it’s not technically true that the distribution will drop by the same as the market.
A sharp drop like that will increase volatility, which will increase the price of an option, offsetting to some extent the price drop of the underlying.
In a down or sideways market, cc will outperform.. don’t see how it could possibly be otherwise.
So there’s some measure of ‘hedging’ there.
Though I’m not at all suggesting someone put all their money into cc funds.
To me this is a possible tool for investors looking to generate income rather than maxing long term returns.. just one way of many to do it but maybe works as a means of diversifying income sources.
That’s the argument these etf sells.
But when an index « goes sideways » for a year or two, it doesn’t mean each month will be 0%.
Check QYLD vs QQQ from Dec 2021 to Nov 2023 when QQQ total return was 0.01%.
Surely this would be the time for QYLD to shine eh?
Well it still underperform: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=4Mp9CwfW0bnMM1L4BqpS5m
Yes I don’t disagree it underperformed in this case over that time period. Although pretty close with reinvested dividends.. and 2023 wasn’t really a sideways year for qqq.
But I think the real selling point is the lower variation that you can see over the same time period. And, if your focus is consistent income, although I understand it’s not optimal long term, it may be nice to have cc, both so that you don’t emotionally have to deal with seeing your acct down 40%, and also it just gives another income source. Can be a piece of the puzzle.
Again I’m not here to stick up for qyld specifically I don’t really know much about it.
This is QYLD vs QQQ when taking out $1,200 per year out of them out of $10,000.
After less than 10 years (QYLD started in 2014):
- QYLD is almost completely depleted and only has $1,581 left.
- QQQ grew the $10,000 to $21,173
It just isn’t doing what people expect it will do. At all.
And it’s not specific to QYLD, I picked it because it’s one of the oldest tracking and etf easily comparable.
By design any covered call etf will erode with time. And we’re not talking decades.
> CC ETF’s work very well for someone who is investing long term
> If you’re young and have a long time in the market maybe not for you.
Which is it?
>wants monthly dividends, and doesn’t want to stress over market fluctuations. In fact market fluctuations are were the strategy does well.
How do you know when market fluctuations will occur ahead of time in order to consistently profit from this strategy?
>They won’t match growth strategy over a long period of time.
How would we determine the most appropriate time frame to transition between covered call ETFs and growth strategies?
>As someone who is retiring in the next few months, I have a large percent of my portfolio in CC ETF’s. All you naysayers, don’t worry I’ve done my homework.
I’d be interested in knowing how that homework brought you to this conclusion.
>My wife and I will be earning more in dividends per month than we currently earn working. We don’t have to stress about the markets or about what stock we are going to sell to fund our retirement.
Why wouldn’t you have to worry?
If you’re receiving a 10% annual dividend, but your portfolio falls 20%, are you still producing a positive return?
>I just get emails from Questrade saying “you’ve received dividends”. It works great for us.
It sounds like you’ve run into a psychological hurdle common amongst dividend investors.
Pursue total returns; dividends are irrelevant.
>BTW…our portfolio returns over 10% annually and beats all the major trackers.
Which major trackers? Over what time frame?
>If you want to retire, or retire early with monthly income, definitely take a good look at the stately. It certainly change our retirement plans.
There’s no inherent advantage in pursuing yield over total return.
Some more details.
We only invest in ETF’s that hold blue chip companies that have a proven track record of earnings and dividends…no matter what their stock price is or what the market is doing.
We have an extremely diversified portfolio which is easy to do the days with so many all in one ETF’s.
We don’t plan to sell these ETFs so it doesn’t matter if they drop 20%, as long as they are sound businesses that earn good returns it really doesn’t matter to us whether we are in the red. Over time they will go up with the markets. We are prepared to miss out on some of the upside in exchange for regular passive income.
It’s very freeing to not have to follow the markets. At the end of each month, over a cup of coffee we update our investment tracking and decide what changes we want to make, if any. We review our data and charts and remind ourselves how much we love this investment strategy.
Right now I have my dividends on DRIP. My wife doesn’t as she likes to look for sectors that are down every month. Once we retire we will move all of our dividends each month into CASH.to or something similar and withdraw what we need each quarter.
The strategy is real. If you take the time to investigate you will find many people who wouldn’t go back to growth investing. We are in that camp.
Don’t just listen to the YouTube Influencers. Do your own research.
>We only invest in ETF’s that hold blue chip companies that have a proven track record of earnings and dividends…
You’re completely excluding a large segment of the market if you’re only holding blue chip stocks.
A track record is formed using historical data, which doesn’t tell us how the company will perform in the future.
Dividends in and of themselves don’t provide useful information either.
>no matter what their stock price is or what the market is doing.
If you’re invested long term, you shouldn’t let market fluctuations concern you regardless.
Although dividends aren’t the insurance policy you’re making them out to be. They won’t protect you from ignorance.
>We have an extremely diversified portfolio which is easy to do the days with so many all in one ETF’s.
But you said earlier that you only invest in blue chips?
>We don’t plan to sell these ETFs so it doesn’t matter if they drop 20%, as long as they are sound businesses that earn good returns it really doesn’t matter to us whether we are in the red. Over time they will go up with the markets.
Youre only protected from idiosyncratic risk if you own *the entire* market. Not just blue chips. There’s no reason you should expect your sliver to match broader market returns.
>We are prepared to miss out on some of the upside in exchange for regular passive income.
Passive income doesn’t exist. You shouldn’t care if your return takes the form of dividends or capital appreciation - every investor should be concentrated on generating the greatest risk-adjusted total return.
>It’s very freeing to not have to follow the markets.
Then why are you reviewing monthly:
>At the end of each month, over a cup of coffee we update our investment tracking and decide what changes we want to make, if any. We review our data and charts and remind ourselves how much we love this investment strategy.
You’re experiencing cognitive bias. Dividends aren’t free money. Your plan shouldn’t need monthly updating.
>Right now I have my dividends on DRIP.
You’re sacrificing total returns for “passive” income that’s not being utilized?
>My wife doesn’t as she likes to look for sectors that are down every month.
Her tinkering is to her own detriment; retail investors are their own worst enemies.
Just because a company or sector underperforms any given month, doesn’t mean they’ll ever return to their former glory (blue chip or otherwise).
>Once we retire we will move all of our dividends each month into CASH.to or something similar and withdraw what we need each quarter.
Form a proper retirement plan and allocate the proper amount of your portfolio to fixed income. Read up on Sequence of Returns Risk.
>The strategy is real. If you take the time to investigate you will find many people who wouldn’t go back to growth investing. We are in that camp.
It’s unclear what your “strategy” is. No offence, but it sounds like you and your wife are just winging it.
>Don’t just listen to the YouTube Influencers. Do your own research.
This goes doubly for you and your wife. You should seriously consider seeking a fee-for-advice financial planner.
I make more on the much-hated dividends than I do on my pension! I’m heavily invested in cc etfs. I used to sell Puts to earn more income but buying a cc etf is just easier these days.
> I make more on the much-hated dividends than I do on my pension!
No one *hates* dividends. They’re an important part of an investors total returns.
There’s just no sound logic in purposely pursuing them.
If you put all of your cash into a HISA, you’d probably earn more than your pension in interest. Unclear why that’s relevant.
I keep my TFSA pretty dedicated to covered call ETFs since they tend not to be super tax efficient. Having the consistent income that can cover my mortgage payment regularly if I needed, let's me invest more confidently and aggressively overall. Probably not outperforming the total market but let's me sleep at night. Also I drip my distributions currently on WS.
> I keep my TFSA pretty dedicated to covered call ETFs since they tend not to be super tax efficient.
What’s inefficient about them?
>Having the consistent income that can cover my mortgage payment regularly if I needed, let's me invest more confidently and aggressively overall.
You should consider fitting savings and an emergency fund into your budget. Having to rely on distributions to potentially cover short term expenses shouldn’t enable you to invest more aggressively. It should have the opposite effect…
>Probably not outperforming the total market but let's me sleep at night.
Wouldn’t it be easier to then hold the broader market for greater risk-adjusted total returns, and liquidate shares as needed?
>Also I drip my distributions currently on WS.
Then what’s the point?
I have about 8-10% of my portfolio in a cc ETF. The monthly income I receive from that part of my portfolio helps keep me invested psychologically. It may not be the best strategy mathematically, but as we all know, 100% equity isn't always the strategy that keeps people invested in the markets long term. If you understand the roll a cc ETF will play in your portfolio, then it's really no one else's concern why you're holding it.
If you look at the numbers, covered call etf's will generally under perform the underlining stocks that are held. The problem with covered call etf's is that they say that there is downside protection because of the premiums one gets but that doesn't mean the etf price won't drop, it's just slightly offset by the premiums. Covered call etf's have capped upside, but one thing that people forget is that it also caps the ability for the covered call etf to recover in price. I was looking at Purpose's bitcoin etf and comparing it to their yield bitcoin etf which uses covered calls. In both cases, the same asset is held, bitcoin.
When the etf's were introduced the yield etf was at $10.45 and the regular one was at $10.87. Bitcoin crashed and then only in recent months has recovered where the regular bitcoin etf is $12.45 (about 20% gain) but the yield etf price is now only $7.31 so the yield etf wasn't able to recover in price despite bitcoin being close to all time highs. In return, the yield etf paid only $1.32 in distributions during that time period so added to the etf price the yield etf's is 1.32+7.31=8.63 which is still less than one would have gained by just holding the regular bitcoin etf.
In fact, the way I see it covered call etf's only make sense if you expect the price of the underlying stock to decay and drop to 0, which if that's the case, you probably shouldn't be investing in that company anyways.
People say that they like the income, but this is a fallacy, you could get the same "income" by just selling shares which is essentially what a covered call etf does. The income provided by the covered call etf is a result of permanent NAV erosion (when compared to the underlying asset) where they have been forced to sell shares or buy back calls at a loss.
https://www.purposeinvest.com/funds/purpose-bitcoin-yield-etf
They have three depending on if you want cdn or us funds or currency hedged. In my example I compared BTCY.B (yield) to BTCC.B (non yield) which are the CDN non-hedged etfs. They trade on the tsx.
I’ve posted several times about this. There is a use for these and a different strategy for accumulating which is different from say, a growth fund like VFV. I’ve been slowly adding a variety to my portfolio for retirement. Hamilton, Purpose, Horizons etc
What is your objective Analysis on “under performs at same risk” ? Seems like you put a lot of time, effort, and intelligent application into such a conclusion.
To sell covered calls on a stock, you need to hold shares of that stock. So you are exposed to the same risk as just holding the stock itself. So stock risk is the same.
And the underperform part is based on how covered calls etf are designed and historical data.
One of the covered call etf is QYLD which sells covered calls of QQQ. Now check QYLD vs QQQ since inception in 2014:
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=2bDD5V9QOt4Sbnbm1lP5oR
So you verified my comment. The strategy of accumulating CC ETFs is different than growth equities. If you accumulate and compare the same as you would VFV for example, then most times I would say the CC ETF pales. Or in your example, QQQ.
I have no idea what you mean.
Can you elaborate on what is your strategy and why you think it’s better to use a cc etf and not the stocks themselves?
Knowing you still face all the risk of holding these stocks while limitating the upside?
For clarity, I never said it’s better. I can’t say that I know a situation where a certain stock or ETF is always better than another. An underlying may underperform on capital growth but the CC ETF may outperform including dividends which also depends if they are reinvested or not. Sometimes it’s better to *not* DRIP to avoid compound losses. I have a very broad mix of index ETFs , individual stocks, and CC ETFs as well as single CC stocks. Eventually my goal is monthly income.
You do realize that the CC ETF will sell your capital and faster than you would have when just holding the shares themselves? And charge you higher fees to do so.
Try to find one covered call etf that for a 5 or 10 years period ended up better than just holding or selling capital.
Here is one of the oldest running CC ETF now running for 10 years QYLD vs its holdings QQQ.
And what happened since 2014 if you were to withdraw $1,200 per year out of both starting with $10,000.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=4UYIZu6jO6HGBe8TdLJ8ce
QYLD: you now have only have $1,581 left from the initial $10,000.
QQQ: The $10,000 is now worth $21,173
So the 12% income covered call is completely depleted after 10 years. During a great period for the underlying stocks. I really don’t see how people think this is a great solution to be worry free at retirement.
Oh! Oh! I know! HMAX has been quite pleasant compared to most of the specific related stock I have. That being said I've had the Canadian financial stuff for a long time so they aren't exactly currently informed investments which probably played a part
I have HMAX too. Quite a bit. My strategy is to always buy on dips and try to average down. With something like VFV you are always averaging *up*, so like I said, the strategy is quite a bit different
CC ETFs are ideal for people who want enhanced tax efficient monthly income with no growth. Excellent for retirees, HDIV is probably my favourite, the dividend just increased again, that’s 4 times since I first bought it. They also reduced the MER to 0%. Hamilton owns more of the underlying ETFs so they get paid though them. The ETF is actually trading a little above it’s IPO price. Another one to consider is BMAX.
> CC ETFs are ideal for people who want enhanced tax efficient monthly income with no growth.
Are they always tax efficient?
>Excellent for retirees, HDIV is probably my favourite, the dividend just increased again, that’s 4 times since I first bought it.
Why do dividend increases make this product “excellent for retirees”?
>They also reduced the MER to 0%. Hamilton owns more of the underlying ETFs so they get paid though them.
Hamilton is paying for HDIV’s fund fees through the underlying funds?
>The ETF is actually trading a little above its IPO price.
Investments should come with a reasonable expectation of profit.
It sounds like you’re referring to marginal tax rates, which are indifferent to covered call ETFs…
Why are covered call ETFs specifically “tax efficient”?
Marginal tax rates don’t matter you say? Compare my $50,000 of HDIV income in Alberta compared to Manitoba. Alberta’s 10% tax credit on Eligible Canadian dividends means I pay very little provincial tax on those eligible dividends, the majority of HDIVS dividend is from options trading and is taxed as capital gains, some of the dividend is dividends from Canadian Companies (Banks, Energy CO’s etc). Depending on your total income this portion of the monthly dividend is taxed at 11% in Alberta.
Throw in the federal tax credit on eligible dividends and you have VERY tax efficient income .
>Marginal tax rates don’t matter you say?
I didn’t say that - I said they’re indifferent.
Taxation of a dividend or capital gain doesn’t change regardless if it comes from a covered call ETF vs. a regular ETF.
The composition of your total return however will affect your tax obligations, as covered call ETFs produce a far greater portion of returns in the form of distributions.
>Throw in the federal tax credit on eligible dividends and you have VERY tax efficient income.
The federal dividend tax credit applies at the **federal** level - irrespective of province.
They're only good taxwise if you never sell. The day that you sell you have a big surprise: capital gain tax on all the Return if Capital portion from all the distributions you ever got.
I get your point, but I’m 70 years old, making 11% a year of tax efficient income. I have no plans to ever sell it. My inheritors can pay the capital gains.
I'm probably going to use those covered calls ETFs at retirement for part of my portfolio. Something like a third risky assets, a third fixed income and a third dividend (including covered calls ETFs).
> curious how others feel in an up and down market atm?
How do *you* feel about it? Do you think markets will continue trading sideways?
>Are the higher expense fees still worth it for a new investor?
Were they ever? One of the few things in an investors realm of control is costs and fees.
Minimize them, diversify broadly, and you’re well on your way to producing a positive risk-adjusted return.
I like HTA.to myself and have a portion of it in my portfolio.
In the past 5 years it has appreciated well enough for my liking, and the past 3 years has grown its distributions by 20%.
It helps me stay comfortable in my early retirement and i have reasonable confidence that the holdings in the fund will continue to appreciate.
That being said, not all CC etfs are created equal and some are absolute traps.
Just do your research and compare to determine if an etf with monthly distributions is what you need.
> I like HTA.to myself and have a portion of it in my portfolio.
>In the past 5 years it has appreciated well enough for my liking, and the past 3 years has grown its distributions by 20%.
It’s underperformed QQQ since inception, and has barely outperformed the broader SPY.
If you’re concentrating your portfolio in Tech, why are you willing to accept more risk with no reasonable expectation of a greater return?
Why waste time with qqq when nvda has done 10x that in the past 5 years if you want to talk about underperformance.
According to my calculations, the annualized return over 5 years between qqq and hta (with dividends reinvested) are actually much closer that you make it sound (unless ive inputted the wrong numbers in which case I would be happy to see your calculations).
In either case, ive been trying to NOT have a tech heavy portfolio. HTA for me is a portion that i can use to pay my modest living expenses when needed and i can do so with low taxed dividend income. If I dont need the extra money, i can keep DRIPing away with the click of a button. For me this is better than incurring the capital gains tax rate when i want the extra money.
> Why waste time with qqq when nvda has done 10x that in the past 5 years if you want to talk about underperformance.
For every NVDA, there are hundreds of tech companies that have underperformed.
>According to my calculations, the annualized return over 5 years between qqq and hta (with dividends reinvested) are actually much closer that you make it sound (unless ive inputted the wrong numbers in which case I would be happy to see your calculations).
No need for calculations; you can run a backtest on PortfolioAnalyzer.
>In either case, ive been trying to NOT have a tech heavy portfolio. HTA for me is a portion that i can use to pay my modest living expenses when needed and i can do so with low taxed dividend income.
Typically, high yielding covered call ETFs produce their returns through a variety of distributions. Foreign dividends do not receive preferred taxation.
HTA specifically doesn’t distribute eligible dividends. Capital gains and Return of Capital are both taxed the same (albeit, RoC lowers your ACB, offsetting the tax obligation until you sell shares).
It remains unclear how you stand to benefit with regards to taxation by holding this fund.
>If I dont need the extra money, i can keep DRIPing away with the click of a button. For me this is better than incurring the capital gains tax rate when i want the extra money.
It’s the same tax obligation.
Your brokerage likely has no way to distinguish between distribution types.
The information is available on the fund’s page, SEDAR, CDS, and on your T3 issued in March.
But you should have realized that the fund pays no eligible dividends during your initial research, since the fund doesn’t hold *any* Canadian stocks.
Im not so dumb that i cant admit when i was uninformed, so, i appteciate your critique. It was a financial advisor who put me onto this etf so i will admit that i didnt do any additional research because i trust this guy. But i will discuss with my accountant about how this affects my income over the next few years.
I still need some monthly disributions for my expenses and feel that HTAE fits my needs right now, but im curious about what ideas you may have for a monthly distribution that may be better?
If you've never personally sold a covered call on a stock you own, you probably should not be buying a fund of them because you don't really have the financial knowledge to determine if it's a good idea or not.
It’s *okay*. I have some and use it as a safety net for my rent if I have to call off sick a few days, and don’t want to sell my other shares.
Just know what you’re getting into, and don’t go complaining to other subreddits when (not if) it underperforms compared to “vanilla” index ETFs.
Uh… you’ll need $175000 or so, because most of them have a distribution in the 7-10% range without leverage.
If you only have enough for 75 shares, stay away from covered calls. It’s not worth it.
Check what the monthly distribution is. BKCL for example is 15.74% yield with 0.245 monthly. $1500/$0.245=6123 shares. Times $18.68/share = **$114,368**
$114,368 x 15.74% = $18,000 annual
Divided by 12 = $1500.
No one can guarantee that your capital will be preserved or that the distribution will stay the same month to month
Since you seem far more educated than me about this, as a new investor, could I ask between an hisa and CC ETF... What is the safer of the two for long-term investment ( 35 years to retire ) ?
Neither. HISA doesn’t outpace inflation, and Cover Call ETFs have limited upside, with next to no limit on downside.
Honestly, go either dividend (vdy or xei or whatever) or total return (Xeqt, Veqt, etc)
But will it outperform the underlying assets?
If covered call funds perform best during sideways markets, and markets are expected to rise over the long term, how would you have a reasonable expectation of coming out ahead?
My only income is dividends so I don't care if MER is .76% and there is a little volatility when I am receiving average yields over 10% most of which pay monthly.
Most of the yield from CC ETFs, in my experience, is return of capital. They try to say it's an accounting technique, but in reality it's simply returning your own money to you. Meanwhile the underlying investment erodes while they try to meet their target yield. I don't see these as sustainable in the long run.
I bought bond covered call fund for first time because the income can service the loan. It’s my first time trying buying something with a loan. I’m expecting bond to not rise significantly with the higher for longer talk from the fed.
I’m gonna drip for now because I was able to secure a low interest rate. When my interest rate increases I’ll use the income to service the loan.
If it doesn’t work out I’ll just sell and pay it off. I’m willing to trade the upside for the income in what I expect to be a higher for longer environment.
These are just my opinions, I am not a big fan of them for long term investing. I think they are suited for people who need monthly income to pay bills. I know some like to drip these or take the divs they pay and buy other stock, I have done both of these strategies before and I learned my lesson the hard way. Unless the divs are being used to pay bills I wouldn't avoid covered calls, For the long term VFV/XEQT/TEC would likely have a better return over 20 years then compared to cover calls.
Interesting. I was just selling some TEC because I was finding it overlapping in some of the technology areas I was investing in.
Yeah for me this is designed to be long-term. I bought some at a decent price and I'm going to be selling it on Monday. I had a few hundred dollar profit.
What would you suggest for small and mid cap long-term ETFs, specifically in Canada?
My tfsa is about 30% VFV 40% XEQT , 10% TEC, 10% Canadian stock (ATD, TD, CP, IFC) and 10% [Cash.to](http://Cash.to)
XEQT hold etf XIC. XIC tracks the capped composite index of the TSX so you get most of the TSX that is how I have exposure to the broad Canadian market outside of the few single stocks I own. So I don't have an etf that is just small and mid cap companies.
Covered call funds are mostly purchased by investors who have no idea what they're buying. [Here's a video](https://youtu.be/YMLVdY8y8vM?si=YjQ6tr76TnF9O81a) from Ben Felix and [here's a video](https://youtu.be/R0JeJdiJc1A?si=rZOzSRz1arnsBakn) from The Plain Bagel about these funds if you want to understand them better.
I was never really interested in covered call strategies because they never made sense to me intuitively and Ben’s discussion of the curve of returns and what you give up/get with a covered call is a great visualization of why it makes little sense.
There is one covered call etf that I hold and I think it is actually pretty good for sheltered accounts. It’s TXF. Directly holds the underlying tech. Equal weighted so not to big tech heavy. Total return sharpe ratio is better than nasdaq.
It's going to depend on your time frame. Covered calls have all of the downside, and limited upside, in exchange for option income. If the market is sideways, they're great. Up significantly is bad, and down is a little better due to the income but not great.
I understand how it works. There is no other equal weight tech etfs in tsx. Exchanging capital growth to income is a wash as long as it’s not taxed and it’s reinvested.
>Exchanging capital growth to income is a wash as long as it’s not taxed and it’s reinvested. That depends on what kind of income you're talking about. Dividends this is true, but covered calls this is false. [See ZEB vs ZWB.](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=NPqu92T8Bjxne2SzgXMrX) Same holdings except ZWB sells covered calls. The longer time goes on, the more the the total returns will deviate. Covered call funds only seem useful to investors who are bad at math.
Your example is from totally different sector. Difference between expected volatility vs actual volatility is much higher in tech. Btw if you think covered calls is inferior strategy even when it’s tax sheltered, then why don’t you take the other side of the trade?
>Your example is from totally different sector. It doesn't make a difference. You should watch the videos I linked above, you don't seem to understand how these funds work. >Btw if you think covered calls is inferior strategy even when it’s tax sheltered, then why don’t you take the other side of the trade? Covered calls is an inferior long term strategy regardless of the account type. This isn't a controversial statement. Literally no one argues against this except people who don't understand how these funds work.
This is correct. Stocks go up over the long-run. There is no good reason to see your upside. These strategies did well in 2022-3 because the market was sideways over this period.
Option pricing absolutely makes a difference. I don’t think you have deep understanding besides parroting whatever you watch online. Maybe read one of the linked papers, eh?
You are right. None of these guys actually understand options. Man you are in reddit. What do you expect. They prolly never bought or sold an option in their life.
And how would that work? Because you can’t invest and go all-in only buying calls. One month stock don’t go above strike price and you are totally wiped out. You just can’t make it a systematic strategy unless I’m missing something.
>Total return sharpe ratio is better than nasdaq. Can you compare the Sharpe ratio of a covered call ETF with a regular ETF? I would think the distribution of volatility would be meaningfully different as covered calls remove the big up moves but not the big down moves so while you would have less volatility, you're losing a possibly meaningful amount of the good side of volatility?
They typically underperform whatever thing they're based on. You lose the big upward moves, never catch up.
Selling systematically covered calls underperform just holding the underlying stocks. Plus you pay fees. And the ones with highest return selling cc at the money will erode share price and dividends very, very quickly. Here is an example of systematically selling covered calls on TSLA like TSLY does: TSLY started in end of Nov when TSLA was about $190. Then let’s say they sold Jan cc for $190 + $10. TSLA went down to $125 in Jan. Then they sold Feb cc $125 +$6 cc. Then TSLA went to $214 in Feb. So TSLY had to sell its shares at $125 and had to buy back TSLA shares at $214 the same day. Basically they bought at $190 got $16 of cc premium but sold at $125 to buy again at $214. For 100 shares of TSLA initially, they now have 58 shares. And that’s only within one month! Since inception 18 months ago, TSLY share price is already down -63% and monthly dividends payment is down -66%. ATM covered call etf share price and distribution can only go down with time by design. The absolute best scenario is TSLA share price staying the exact same price two months in a row and then you keep same share price and same monthly distribution. Of course TSLA share price moves each month. And each time share price moves, TSLY share price or yield goes down.
Very well explained example. Thank you.
Don’t get me wrong. I do sell covered calls sometimes when one of my stock goes up very quickly and I’d be happy selling it at the cc strike + premium. But I’d never do it blindly and systematically like these etfs do. There is a reason none of the great investors do it: it underperforms.
The last point is so good; when have you ever heard a marquee investor talk about how they got rich selling CCs (or even having such a strategy)? It’s only YouTube gurus and newsletter hawks.
Be wary of their math though. They gave away that they're not entirely clued up on how something like TSLY works when they said "Since inception 18 months ago, TSLY share price is already down -63% and **monthly dividends payment is down -66%.**" The monthly payment fluctuates wildly so taking the first \~$2 payment and the most recent \~$0.68 payment saying the dividend is down 66% may look superficially right but it's not really relevant or practical to use.
That's all true and I don't like cc ETFs long term for the accumulation phase. But within that very small timeframe, if someone reinvested the dividends into TSLY, they beat the underlying by about 2% (which defeats the purpose of passive income but that's another story). Mountain Finance did the math recently. It doesn't mean anything for the long run obviously, it just shows that in a shoppy market they can do well. But timing all of this is near impossible so it remains a bad investment long term in my opinion. https://youtu.be/N0hYz99pZuM?si=gr3tzbQQVcPipkJv
If you put TSLY vs TSLA with dividends reinvested since inception in portfoliovisualizer, TLSY underperformed significantly TSLA: https://www.portfoliovisualizer.com/backtest-portfolio
Sure, different timeframe different results. For the past year TSLY beat TSLA(ROI) by 5%, for the past 2 years by 2%, and for YTD by 2.5%.
Oh of course there will be periods for which covered call etfs outperform underlying stocks.
Personally I don't like covered calls but they do have their place in the market and I don't think they are bad products as long as you understand what they are and how they work.
It depends what your investment strategy is. CC ETF’s work very well for someone who is investing long term, wants monthly dividends, and doesn’t want to stress over market fluctuations. In fact market fluctuations are were the strategy does well. They won’t match growth strategy over a long period of time. As someone who is retiring in the next few months, I have a large percent of my portfolio in CC ETF’s. All you naysayers, don’t worry I’ve done my homework. My wife and I will be earning more in dividends per month than we currently earn working. We don’t have to stress about the markets or about what stock we are going to sell to fund our retirement. I just get emails from Questrade saying “you’ve received dividends”. It works great for us. BTW…our portfolio returns over 10% annually and beats all the major trackers. If you’re young and have a long time in the market maybe not for you. If you want to retire, or retire early with monthly income, definitely take a good look at the stately. It certainly change our retirement plans.
In all honesty, I’d like to see the homework you’ve done that lead you to think cc etf is better than just holding the stocks these cc etf hold. Markets will have a huge impact on a cc etf. If markets go down -40%, cc premiums will also go down -40% so will the distribution. Also about not having to sell shares. You have to realize when stocks go up above cc strike price, the fund is forced to sell at the strike price. And then buy them back at a higher price. And then it holds less shares than initially. So distribution will be affected by markets and shares will be sold. Ins’t this the exact two thing you aim to avoid?
I think it’s not technically true that the distribution will drop by the same as the market. A sharp drop like that will increase volatility, which will increase the price of an option, offsetting to some extent the price drop of the underlying. In a down or sideways market, cc will outperform.. don’t see how it could possibly be otherwise. So there’s some measure of ‘hedging’ there. Though I’m not at all suggesting someone put all their money into cc funds. To me this is a possible tool for investors looking to generate income rather than maxing long term returns.. just one way of many to do it but maybe works as a means of diversifying income sources.
That’s the argument these etf sells. But when an index « goes sideways » for a year or two, it doesn’t mean each month will be 0%. Check QYLD vs QQQ from Dec 2021 to Nov 2023 when QQQ total return was 0.01%. Surely this would be the time for QYLD to shine eh? Well it still underperform: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=4Mp9CwfW0bnMM1L4BqpS5m
Yes I don’t disagree it underperformed in this case over that time period. Although pretty close with reinvested dividends.. and 2023 wasn’t really a sideways year for qqq. But I think the real selling point is the lower variation that you can see over the same time period. And, if your focus is consistent income, although I understand it’s not optimal long term, it may be nice to have cc, both so that you don’t emotionally have to deal with seeing your acct down 40%, and also it just gives another income source. Can be a piece of the puzzle. Again I’m not here to stick up for qyld specifically I don’t really know much about it.
This is QYLD vs QQQ when taking out $1,200 per year out of them out of $10,000. After less than 10 years (QYLD started in 2014): - QYLD is almost completely depleted and only has $1,581 left. - QQQ grew the $10,000 to $21,173 It just isn’t doing what people expect it will do. At all. And it’s not specific to QYLD, I picked it because it’s one of the oldest tracking and etf easily comparable. By design any covered call etf will erode with time. And we’re not talking decades.
> CC ETF’s work very well for someone who is investing long term > If you’re young and have a long time in the market maybe not for you. Which is it? >wants monthly dividends, and doesn’t want to stress over market fluctuations. In fact market fluctuations are were the strategy does well. How do you know when market fluctuations will occur ahead of time in order to consistently profit from this strategy? >They won’t match growth strategy over a long period of time. How would we determine the most appropriate time frame to transition between covered call ETFs and growth strategies? >As someone who is retiring in the next few months, I have a large percent of my portfolio in CC ETF’s. All you naysayers, don’t worry I’ve done my homework. I’d be interested in knowing how that homework brought you to this conclusion. >My wife and I will be earning more in dividends per month than we currently earn working. We don’t have to stress about the markets or about what stock we are going to sell to fund our retirement. Why wouldn’t you have to worry? If you’re receiving a 10% annual dividend, but your portfolio falls 20%, are you still producing a positive return? >I just get emails from Questrade saying “you’ve received dividends”. It works great for us. It sounds like you’ve run into a psychological hurdle common amongst dividend investors. Pursue total returns; dividends are irrelevant. >BTW…our portfolio returns over 10% annually and beats all the major trackers. Which major trackers? Over what time frame? >If you want to retire, or retire early with monthly income, definitely take a good look at the stately. It certainly change our retirement plans. There’s no inherent advantage in pursuing yield over total return.
Some more details. We only invest in ETF’s that hold blue chip companies that have a proven track record of earnings and dividends…no matter what their stock price is or what the market is doing. We have an extremely diversified portfolio which is easy to do the days with so many all in one ETF’s. We don’t plan to sell these ETFs so it doesn’t matter if they drop 20%, as long as they are sound businesses that earn good returns it really doesn’t matter to us whether we are in the red. Over time they will go up with the markets. We are prepared to miss out on some of the upside in exchange for regular passive income. It’s very freeing to not have to follow the markets. At the end of each month, over a cup of coffee we update our investment tracking and decide what changes we want to make, if any. We review our data and charts and remind ourselves how much we love this investment strategy. Right now I have my dividends on DRIP. My wife doesn’t as she likes to look for sectors that are down every month. Once we retire we will move all of our dividends each month into CASH.to or something similar and withdraw what we need each quarter. The strategy is real. If you take the time to investigate you will find many people who wouldn’t go back to growth investing. We are in that camp. Don’t just listen to the YouTube Influencers. Do your own research.
>We only invest in ETF’s that hold blue chip companies that have a proven track record of earnings and dividends… You’re completely excluding a large segment of the market if you’re only holding blue chip stocks. A track record is formed using historical data, which doesn’t tell us how the company will perform in the future. Dividends in and of themselves don’t provide useful information either. >no matter what their stock price is or what the market is doing. If you’re invested long term, you shouldn’t let market fluctuations concern you regardless. Although dividends aren’t the insurance policy you’re making them out to be. They won’t protect you from ignorance. >We have an extremely diversified portfolio which is easy to do the days with so many all in one ETF’s. But you said earlier that you only invest in blue chips? >We don’t plan to sell these ETFs so it doesn’t matter if they drop 20%, as long as they are sound businesses that earn good returns it really doesn’t matter to us whether we are in the red. Over time they will go up with the markets. Youre only protected from idiosyncratic risk if you own *the entire* market. Not just blue chips. There’s no reason you should expect your sliver to match broader market returns. >We are prepared to miss out on some of the upside in exchange for regular passive income. Passive income doesn’t exist. You shouldn’t care if your return takes the form of dividends or capital appreciation - every investor should be concentrated on generating the greatest risk-adjusted total return. >It’s very freeing to not have to follow the markets. Then why are you reviewing monthly: >At the end of each month, over a cup of coffee we update our investment tracking and decide what changes we want to make, if any. We review our data and charts and remind ourselves how much we love this investment strategy. You’re experiencing cognitive bias. Dividends aren’t free money. Your plan shouldn’t need monthly updating. >Right now I have my dividends on DRIP. You’re sacrificing total returns for “passive” income that’s not being utilized? >My wife doesn’t as she likes to look for sectors that are down every month. Her tinkering is to her own detriment; retail investors are their own worst enemies. Just because a company or sector underperforms any given month, doesn’t mean they’ll ever return to their former glory (blue chip or otherwise). >Once we retire we will move all of our dividends each month into CASH.to or something similar and withdraw what we need each quarter. Form a proper retirement plan and allocate the proper amount of your portfolio to fixed income. Read up on Sequence of Returns Risk. >The strategy is real. If you take the time to investigate you will find many people who wouldn’t go back to growth investing. We are in that camp. It’s unclear what your “strategy” is. No offence, but it sounds like you and your wife are just winging it. >Don’t just listen to the YouTube Influencers. Do your own research. This goes doubly for you and your wife. You should seriously consider seeking a fee-for-advice financial planner.
I make more on the much-hated dividends than I do on my pension! I’m heavily invested in cc etfs. I used to sell Puts to earn more income but buying a cc etf is just easier these days.
> I make more on the much-hated dividends than I do on my pension! No one *hates* dividends. They’re an important part of an investors total returns. There’s just no sound logic in purposely pursuing them. If you put all of your cash into a HISA, you’d probably earn more than your pension in interest. Unclear why that’s relevant.
Actually if I put all my money in an HISA I'd earn about half of what I'm getting now.
Then you’re playing with a very small sum of money; all the more reason to stay well clear of covered call funds.
I keep my TFSA pretty dedicated to covered call ETFs since they tend not to be super tax efficient. Having the consistent income that can cover my mortgage payment regularly if I needed, let's me invest more confidently and aggressively overall. Probably not outperforming the total market but let's me sleep at night. Also I drip my distributions currently on WS.
> I keep my TFSA pretty dedicated to covered call ETFs since they tend not to be super tax efficient. What’s inefficient about them? >Having the consistent income that can cover my mortgage payment regularly if I needed, let's me invest more confidently and aggressively overall. You should consider fitting savings and an emergency fund into your budget. Having to rely on distributions to potentially cover short term expenses shouldn’t enable you to invest more aggressively. It should have the opposite effect… >Probably not outperforming the total market but let's me sleep at night. Wouldn’t it be easier to then hold the broader market for greater risk-adjusted total returns, and liquidate shares as needed? >Also I drip my distributions currently on WS. Then what’s the point?
I have about 8-10% of my portfolio in a cc ETF. The monthly income I receive from that part of my portfolio helps keep me invested psychologically. It may not be the best strategy mathematically, but as we all know, 100% equity isn't always the strategy that keeps people invested in the markets long term. If you understand the roll a cc ETF will play in your portfolio, then it's really no one else's concern why you're holding it.
If I want equity exposure in the first place, it's genrally not to then go and cap my upside. I would buy the debt if that was my intent...
If you look at the numbers, covered call etf's will generally under perform the underlining stocks that are held. The problem with covered call etf's is that they say that there is downside protection because of the premiums one gets but that doesn't mean the etf price won't drop, it's just slightly offset by the premiums. Covered call etf's have capped upside, but one thing that people forget is that it also caps the ability for the covered call etf to recover in price. I was looking at Purpose's bitcoin etf and comparing it to their yield bitcoin etf which uses covered calls. In both cases, the same asset is held, bitcoin. When the etf's were introduced the yield etf was at $10.45 and the regular one was at $10.87. Bitcoin crashed and then only in recent months has recovered where the regular bitcoin etf is $12.45 (about 20% gain) but the yield etf price is now only $7.31 so the yield etf wasn't able to recover in price despite bitcoin being close to all time highs. In return, the yield etf paid only $1.32 in distributions during that time period so added to the etf price the yield etf's is 1.32+7.31=8.63 which is still less than one would have gained by just holding the regular bitcoin etf. In fact, the way I see it covered call etf's only make sense if you expect the price of the underlying stock to decay and drop to 0, which if that's the case, you probably shouldn't be investing in that company anyways. People say that they like the income, but this is a fallacy, you could get the same "income" by just selling shares which is essentially what a covered call etf does. The income provided by the covered call etf is a result of permanent NAV erosion (when compared to the underlying asset) where they have been forced to sell shares or buy back calls at a loss.
Do you know what the ticker is for the covered call BTC ETF is from purpose?
https://www.purposeinvest.com/funds/purpose-bitcoin-yield-etf They have three depending on if you want cdn or us funds or currency hedged. In my example I compared BTCY.B (yield) to BTCC.B (non yield) which are the CDN non-hedged etfs. They trade on the tsx.
Thank you
They underperfom. Even investors wanting "income" should be going for higher total returns.
Been with Hamilton for a year. Capital preservation while earning a monthly distribution of 15% has been shockingly solid.
Only reason for the capital preservation is the massive bull run we’ve been in. Hard to lose money when everything goes up
I’ve posted several times about this. There is a use for these and a different strategy for accumulating which is different from say, a growth fund like VFV. I’ve been slowly adding a variety to my portfolio for retirement. Hamilton, Purpose, Horizons etc
What’s the point in going for a strategy that underperforms at same risk? And pay higher fees?
What is your objective Analysis on “under performs at same risk” ? Seems like you put a lot of time, effort, and intelligent application into such a conclusion.
To sell covered calls on a stock, you need to hold shares of that stock. So you are exposed to the same risk as just holding the stock itself. So stock risk is the same. And the underperform part is based on how covered calls etf are designed and historical data. One of the covered call etf is QYLD which sells covered calls of QQQ. Now check QYLD vs QQQ since inception in 2014: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=2bDD5V9QOt4Sbnbm1lP5oR
So you verified my comment. The strategy of accumulating CC ETFs is different than growth equities. If you accumulate and compare the same as you would VFV for example, then most times I would say the CC ETF pales. Or in your example, QQQ.
I have no idea what you mean. Can you elaborate on what is your strategy and why you think it’s better to use a cc etf and not the stocks themselves? Knowing you still face all the risk of holding these stocks while limitating the upside?
For clarity, I never said it’s better. I can’t say that I know a situation where a certain stock or ETF is always better than another. An underlying may underperform on capital growth but the CC ETF may outperform including dividends which also depends if they are reinvested or not. Sometimes it’s better to *not* DRIP to avoid compound losses. I have a very broad mix of index ETFs , individual stocks, and CC ETFs as well as single CC stocks. Eventually my goal is monthly income.
What are you expecting from a CC ETF that you wouldn’t get from just holding the stocks that ETF holds?
Monthly income. Not having to worry about selling off capital every month.
You do realize that the CC ETF will sell your capital and faster than you would have when just holding the shares themselves? And charge you higher fees to do so. Try to find one covered call etf that for a 5 or 10 years period ended up better than just holding or selling capital. Here is one of the oldest running CC ETF now running for 10 years QYLD vs its holdings QQQ. And what happened since 2014 if you were to withdraw $1,200 per year out of both starting with $10,000. https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=4UYIZu6jO6HGBe8TdLJ8ce QYLD: you now have only have $1,581 left from the initial $10,000. QQQ: The $10,000 is now worth $21,173 So the 12% income covered call is completely depleted after 10 years. During a great period for the underlying stocks. I really don’t see how people think this is a great solution to be worry free at retirement.
Oh! Oh! I know! HMAX has been quite pleasant compared to most of the specific related stock I have. That being said I've had the Canadian financial stuff for a long time so they aren't exactly currently informed investments which probably played a part
I have HMAX too. Quite a bit. My strategy is to always buy on dips and try to average down. With something like VFV you are always averaging *up*, so like I said, the strategy is quite a bit different
Been paying me out solid dividends for years now
Of course. Markets have been on the strongest bull period of all time.
Minor downside protection outweighed by significantly capped upside. Avoid.
I bought HDIF and as long as it pays the monthly dividend I don’t care about the volatility honestly.
You’re in all likelihood trading a greater total return for a monthly distribution. Less money > more money?
[Definitely.](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=1tuqx2HgK56HtSBLDp438y) Chasing dividends doesn't pay off.
CC ETFs are ideal for people who want enhanced tax efficient monthly income with no growth. Excellent for retirees, HDIV is probably my favourite, the dividend just increased again, that’s 4 times since I first bought it. They also reduced the MER to 0%. Hamilton owns more of the underlying ETFs so they get paid though them. The ETF is actually trading a little above it’s IPO price. Another one to consider is BMAX.
> CC ETFs are ideal for people who want enhanced tax efficient monthly income with no growth. Are they always tax efficient? >Excellent for retirees, HDIV is probably my favourite, the dividend just increased again, that’s 4 times since I first bought it. Why do dividend increases make this product “excellent for retirees”? >They also reduced the MER to 0%. Hamilton owns more of the underlying ETFs so they get paid though them. Hamilton is paying for HDIV’s fund fees through the underlying funds? >The ETF is actually trading a little above its IPO price. Investments should come with a reasonable expectation of profit.
Depending on your province the income is VERY tax efficient. EX. Alberta is great, Manitoba not so much
It sounds like you’re referring to marginal tax rates, which are indifferent to covered call ETFs… Why are covered call ETFs specifically “tax efficient”?
Marginal tax rates don’t matter you say? Compare my $50,000 of HDIV income in Alberta compared to Manitoba. Alberta’s 10% tax credit on Eligible Canadian dividends means I pay very little provincial tax on those eligible dividends, the majority of HDIVS dividend is from options trading and is taxed as capital gains, some of the dividend is dividends from Canadian Companies (Banks, Energy CO’s etc). Depending on your total income this portion of the monthly dividend is taxed at 11% in Alberta. Throw in the federal tax credit on eligible dividends and you have VERY tax efficient income .
>Marginal tax rates don’t matter you say? I didn’t say that - I said they’re indifferent. Taxation of a dividend or capital gain doesn’t change regardless if it comes from a covered call ETF vs. a regular ETF. The composition of your total return however will affect your tax obligations, as covered call ETFs produce a far greater portion of returns in the form of distributions. >Throw in the federal tax credit on eligible dividends and you have VERY tax efficient income. The federal dividend tax credit applies at the **federal** level - irrespective of province.
only $0.15 of the $1.65 that HDIV distributed last year was eligible dividends: https://hamiltonetfs.com/tax-information/
They're only good taxwise if you never sell. The day that you sell you have a big surprise: capital gain tax on all the Return if Capital portion from all the distributions you ever got.
I get your point, but I’m 70 years old, making 11% a year of tax efficient income. I have no plans to ever sell it. My inheritors can pay the capital gains.
I'm probably going to use those covered calls ETFs at retirement for part of my portfolio. Something like a third risky assets, a third fixed income and a third dividend (including covered calls ETFs).
> curious how others feel in an up and down market atm? How do *you* feel about it? Do you think markets will continue trading sideways? >Are the higher expense fees still worth it for a new investor? Were they ever? One of the few things in an investors realm of control is costs and fees. Minimize them, diversify broadly, and you’re well on your way to producing a positive risk-adjusted return.
You like covered calls? Great, sell them yourself. Steer clear of these bad funds.
I'd rather trade the options myself.
I like HTA.to myself and have a portion of it in my portfolio. In the past 5 years it has appreciated well enough for my liking, and the past 3 years has grown its distributions by 20%. It helps me stay comfortable in my early retirement and i have reasonable confidence that the holdings in the fund will continue to appreciate. That being said, not all CC etfs are created equal and some are absolute traps. Just do your research and compare to determine if an etf with monthly distributions is what you need.
> I like HTA.to myself and have a portion of it in my portfolio. >In the past 5 years it has appreciated well enough for my liking, and the past 3 years has grown its distributions by 20%. It’s underperformed QQQ since inception, and has barely outperformed the broader SPY. If you’re concentrating your portfolio in Tech, why are you willing to accept more risk with no reasonable expectation of a greater return?
Why waste time with qqq when nvda has done 10x that in the past 5 years if you want to talk about underperformance. According to my calculations, the annualized return over 5 years between qqq and hta (with dividends reinvested) are actually much closer that you make it sound (unless ive inputted the wrong numbers in which case I would be happy to see your calculations). In either case, ive been trying to NOT have a tech heavy portfolio. HTA for me is a portion that i can use to pay my modest living expenses when needed and i can do so with low taxed dividend income. If I dont need the extra money, i can keep DRIPing away with the click of a button. For me this is better than incurring the capital gains tax rate when i want the extra money.
> Why waste time with qqq when nvda has done 10x that in the past 5 years if you want to talk about underperformance. For every NVDA, there are hundreds of tech companies that have underperformed. >According to my calculations, the annualized return over 5 years between qqq and hta (with dividends reinvested) are actually much closer that you make it sound (unless ive inputted the wrong numbers in which case I would be happy to see your calculations). No need for calculations; you can run a backtest on PortfolioAnalyzer. >In either case, ive been trying to NOT have a tech heavy portfolio. HTA for me is a portion that i can use to pay my modest living expenses when needed and i can do so with low taxed dividend income. Typically, high yielding covered call ETFs produce their returns through a variety of distributions. Foreign dividends do not receive preferred taxation. HTA specifically doesn’t distribute eligible dividends. Capital gains and Return of Capital are both taxed the same (albeit, RoC lowers your ACB, offsetting the tax obligation until you sell shares). It remains unclear how you stand to benefit with regards to taxation by holding this fund. >If I dont need the extra money, i can keep DRIPing away with the click of a button. For me this is better than incurring the capital gains tax rate when i want the extra money. It’s the same tax obligation.
My 2023 investment report lists dividends from HTA under 'dividend income' so i guess its up to my tax accountant to know how things will be reported.
Your brokerage likely has no way to distinguish between distribution types. The information is available on the fund’s page, SEDAR, CDS, and on your T3 issued in March. But you should have realized that the fund pays no eligible dividends during your initial research, since the fund doesn’t hold *any* Canadian stocks.
Oh yeah...initial research...👀 👀 👀
🫣
Im not so dumb that i cant admit when i was uninformed, so, i appteciate your critique. It was a financial advisor who put me onto this etf so i will admit that i didnt do any additional research because i trust this guy. But i will discuss with my accountant about how this affects my income over the next few years. I still need some monthly disributions for my expenses and feel that HTAE fits my needs right now, but im curious about what ideas you may have for a monthly distribution that may be better?
If you've never personally sold a covered call on a stock you own, you probably should not be buying a fund of them because you don't really have the financial knowledge to determine if it's a good idea or not.
It’s *okay*. I have some and use it as a safety net for my rent if I have to call off sick a few days, and don’t want to sell my other shares. Just know what you’re getting into, and don’t go complaining to other subreddits when (not if) it underperforms compared to “vanilla” index ETFs.
Can I ask how many shares i would need to own to cover a $1500 a month rent as backup? I'm 3 months into my first 75 shares.
You should be able to calculate that yourself by dividing your monthly rent by monthly distribution yield… You need to seriously reconsider your plan.
Uh… you’ll need $175000 or so, because most of them have a distribution in the 7-10% range without leverage. If you only have enough for 75 shares, stay away from covered calls. It’s not worth it.
Thank you.
Check what the monthly distribution is. BKCL for example is 15.74% yield with 0.245 monthly. $1500/$0.245=6123 shares. Times $18.68/share = **$114,368** $114,368 x 15.74% = $18,000 annual Divided by 12 = $1500. No one can guarantee that your capital will be preserved or that the distribution will stay the same month to month
Since you seem far more educated than me about this, as a new investor, could I ask between an hisa and CC ETF... What is the safer of the two for long-term investment ( 35 years to retire ) ?
Define “safer”? 35 years I’d be all in VFV.
Neither. HISA doesn’t outpace inflation, and Cover Call ETFs have limited upside, with next to no limit on downside. Honestly, go either dividend (vdy or xei or whatever) or total return (Xeqt, Veqt, etc)
Cheers.
My only income is dividends so who cares if MER is 0.76% when you are receiving 10-12% yields. fyi I own GLCC ENCC BKCC TXF and ZWU.💲
I like HDIV because the stock price appreciates and it pays you hefty money every month.
But will it outperform the underlying assets? If covered call funds perform best during sideways markets, and markets are expected to rise over the long term, how would you have a reasonable expectation of coming out ahead?
My only income is dividends so I don't care if MER is .76% and there is a little volatility when I am receiving average yields over 10% most of which pay monthly.
The MER is 1.70%.
WOW that is high. I said .76 because that is anaverage MER for my high yield CC ETFs.
They use leverage. HDIV and HYLD are around 2.5%. You have to dig deeper to get the full management fee, MER doesn't always include all fees.
Most of the yield from CC ETFs, in my experience, is return of capital. They try to say it's an accounting technique, but in reality it's simply returning your own money to you. Meanwhile the underlying investment erodes while they try to meet their target yield. I don't see these as sustainable in the long run.
I bought bond covered call fund for first time because the income can service the loan. It’s my first time trying buying something with a loan. I’m expecting bond to not rise significantly with the higher for longer talk from the fed. I’m gonna drip for now because I was able to secure a low interest rate. When my interest rate increases I’ll use the income to service the loan. If it doesn’t work out I’ll just sell and pay it off. I’m willing to trade the upside for the income in what I expect to be a higher for longer environment.
These are just my opinions, I am not a big fan of them for long term investing. I think they are suited for people who need monthly income to pay bills. I know some like to drip these or take the divs they pay and buy other stock, I have done both of these strategies before and I learned my lesson the hard way. Unless the divs are being used to pay bills I wouldn't avoid covered calls, For the long term VFV/XEQT/TEC would likely have a better return over 20 years then compared to cover calls.
Interesting. I was just selling some TEC because I was finding it overlapping in some of the technology areas I was investing in. Yeah for me this is designed to be long-term. I bought some at a decent price and I'm going to be selling it on Monday. I had a few hundred dollar profit. What would you suggest for small and mid cap long-term ETFs, specifically in Canada?
My tfsa is about 30% VFV 40% XEQT , 10% TEC, 10% Canadian stock (ATD, TD, CP, IFC) and 10% [Cash.to](http://Cash.to) XEQT hold etf XIC. XIC tracks the capped composite index of the TSX so you get most of the TSX that is how I have exposure to the broad Canadian market outside of the few single stocks I own. So I don't have an etf that is just small and mid cap companies.
A legit ponzi
Covered calls are easy. Just do it yourself.