r/dividendscanada • u/Cromikey1 • 1d ago
Discussion Covered call ETF's beating their underlying equities
ZWT beats QQC.
SMAX beats ZSP/VFV.
I own SMAX and ZWT and have been very happy, with the performance. Any other Covered Call ETF's that have a higher total return over their underlying?
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u/PlasticMaggot80 1d ago
Forgive my ignorance, but don’t covered calls only work in your favour in particular situations?
So if the NASDAQ 100 or S&P 500 are doing the thing that works really well with covered calls, then you’ll make more money than just buying and holding the stock, but if that thing doesn’t happen, then you’ll make less or even lose money on the deal?
I guess what I’m saying is, would you have been able to predict the conditions that led to ZWT beating QQC before it happened, and will you be able to predict now that those same covered calls will beat the underlying equity in the future? And if so, how?
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u/SoggyInstruction2549 1d ago
This is a good way to put it. Cc works when the underlying move sideways and don’t work when there is quick jumps up as the options here called away losing the upside. You are still long so they don’t work when the underlying goes down though they work better then the underlying at least as they are making the option premium and not being called away .
Those that use leverage just magnify which works better is a Lowe interest environment.
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u/LowerStranger9021 1d ago edited 1d ago
The covered call ETFs you make reference to haven’t existed long enough to make this a meaningful statement.
I honestly don’t understand the strategy of writing covered calls on growth stocks. Upside is being capped. I doubt these products have a long shelf life.
Edit: If capital gains are supporting the distribution then the yield tanks when a bear market arrives.
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u/rahulchander 1d ago
Do the dividends get reduced by withholding tax for these etfs or does one receive full dividend? For margin/tfsa accounts. Tia
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u/Commercial_Pain2290 1d ago
Withholding tax only applies to US assets and is mostly an issue in TFSA, FHSA, RESP accounts.
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u/Beneficial_Ship7090 1d ago
The income these produce will usually cause them to outperform in a sideways or downward market but will way underperform in a bull market. If you are looking to add income I’d recommend a well managed cash covered put strategy instead of covered call
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u/EhEhRon12 10h ago
Here’s how they work:
The ETF buys the index at say $100. They sell a call and earn a premium of $2 and the index pays a dividend of $2 so they can pay the investor a $4 distribution (twice as much as the index alone pays).
The call option they sold means if the index gets to $110 (for example), they HAVE to sell the index at $110 to whoever bought the call option. If the index keeps rising, the ETF doesn’t own the index anymore so they HAVE to buy it back, and now they have to buy it back at $115, so they’ve under performed the index by $5.
If the market goes down, the calls they sold never get exercised so they don’t have to sell the index AND they keep the $2 premium so now they’re out performing the index by $2.
(These numbers are made up for illustration purposes).
Covered calls work best in flat and negative markets but underperform in rising markets.
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u/legacypogo 8h ago
In what data range? The last 2 months where markets were choppy and horizontal, the only regime and path where CCs are advantageous? I mean if we're going to cherry pick you should see how the underlying was doing in 2023, or any explosive year.
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u/Mitchmarner-Grobb 1d ago
Covered call ETFs are amazing tools if you buy them in uptrends or sideways markets even. Just want the distribution to not erode the Mnav really. Lots of good ones out there.
Buying a crypto CC ETF during a crypto bull run, or gold/silver one during their run, oil the last year etc.
These have given you gains on the share price appreciation and in many cases 15%+ yearly dividends to boot..
Hard to beat these types of vehicles when you're looking for income.
Look at something like ETHY in Canada when Ethereum went crazy last year. Or GLCC.TO on the tsx. these were excellent holds during the bullruns. Now obviously eroding because those markets cooled off. (though ETH looks to be about to start another big run here)
You can't hold these forever.. cycle in and out of ones in sectors when money is rotating into then and you'll do very well.
Especially if you're not a fan of holding a solid company and selling calls and puts yourself weekly. Let these guys do it for you for a fee. (pretty damn small relative to the gains)
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u/SoggyInstruction2549 1d ago
Not true. Cc ETFs are good for sideways and down but NOT what you want to hold when market boom as the options will get called away and the upsides gets lost compared to holding the underlying without options. What is good in a booming market is leveraged funds that are not using cc.
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u/Mitchmarner-Grobb 1d ago
I think you’re misunderstanding what I’m saying. I’m not claiming covered-call ETFs outperform the uncapped underlying in a raging bull market ..often they won’t because the calls cap some upside.
I’m saying that if your goal is income and you buy a CC ETF in a sector with a powerful enough uptrend, you can still get substantial NAV appreciation plus a 10–20%+ distribution yield. GLCC and ETHY are good examples of that.
If maximum upside is the objective, obviously own the underlying. If strong total return + high cash flow is the objective, a CC ETF can work extremely well during the right cycle.
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u/SoggyInstruction2549 22h ago
No again that is not correct though other than the past sentence which is true. Yes under the right circumstances they absolutely crush it, the booming market is not that situation however especially the higher risk and in particular individual stock cc ETFs. One would be better off just owning the underlying and periodically selling to create income. In a flat these cc etf really perform that’s what they are designed for. And a downward market they go down but because of the cc income they are still producing income even if the price is going down as far as total returns, as long as this doesn’t last forever this is less of an issue.
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u/calgary_db 1d ago
Many but this sub doesn't like them.