Covered-call ETFs’ high monthly income has attracted tens of billions of dollars in assets under management.Brian Jackson/Getty Images/iStockphoto
Generating income is foundational for retirement planning and it’s in focus again as inflation concerns loom over bond and dividend yields.
Among the more popular vehicles are covered-call exchange-traded funds (ETFs) paying monthly distributions chiefly from call option premiums.
Chris McHaney, executive vice-president of investment management and strategy at Global X Investments Canada Inc. in Toronto, says covered-call ETFs can be valuable for investors at the decumulation stage.
Often, these products provide monthly distributions that are double the annual yield of bonds and dividends without selling capital, with most income generated by tax-efficient option premiums, he says.
Global X offers several covered-call ETFs, with funds for broad indexes, sectors, commodities, fixed income and even cryptocurrencies.
Some ETFs, such as Global X Enhanced Russell 2000 Covered Call ETF RSCL-NE, use leverage and have annual distribution yields of 15 per cent or more.
Covered-call ETFs’ high monthly income has attracted tens of billions of dollars in assets under management since the world’s first, BMO Covered Call Canadian Banks ETF ZWB-T, launched in 2011.
In 2025, covered-call ETFs attracted $9.8-billion worth of inflows, according to a TD Securities Inc. report, which said the funds are “popular alternatives for those seeking income.”
Still, covered-call ETFs draw mixed reviews.
While some advisors use them for clients seeking consistent, high income, others point to the risks.
For example, a 2023 Mackenzie Investments report found that the strategy’s total return underperformed comparable non-covered-call ETFs over the long term.
However, that underperformance is built into their design, says Ben Felix, chief investment officer with PWL Capital Inc. in Ottawa, whose YouTube channel includes videos about these drawbacks.
“You’re collecting an income premium in exchange for giving up some future upside,” he says.
As well, the downside protection covered-call ETFs offer – an option premium stream even amid falling asset prices – is too modest to make up for lost upside over several years, he says.
Jason Pereira, senior partner and financial planner with Woodgate Financial Inc. in Toronto, is also a critic of covered-call products and says investors must look past the marketing hype.
“The industry continually creates stories around generating higher income streams, but there’s a cost to everything,” he says, noting these ETFs have higher management costs than comparable passive index funds.
The popularity among do-it-yourself investors seeking income is understandable, Mr. Felix says, given that it can be emotionally challenging to sell assets to generate income. But he sees less of a use case for advisors.
Still, covered-call ETFs are well received among many Canadian advisors, says Paul MacDonald, president and co-chief investment officer of Harvest Portfolios Group Inc. in Oakville, Ont., which manages dozens of covered-call funds.
“These products afford more bespoke opportunities to diversify client portfolios,” he says.
Advisors use them as part of a “Swiss Army knife” approach whereby various income streams – interest, dividends, option premiums and capital gains – generate more consistent cash amid different market conditions.
Still, he notes the importance for advisors to underscore the risks – notably, lost upside in fast-rising markets – with clients.
That doesn’t mean the strategy always underperforms over extended periods. Mr. MacDonald points to 2000 to 2010 – considered equities’ “lost decade” – when the CBOE S&P 500 Half Buywrite Index, a covered-call benchmark, had a 23.9 per cent return versus the S&P 500’s 15.1 per cent total return.
Sean Lenehan, portfolio manager and senior investment advisor with Lenehan Wealth Management Group at TD Wealth Private Investment Advice in Windsor, Ont., acknowledges the downsides but still has uses for covered-call ETFs.
“If everyone were rational, with long-term time horizons, and volatility didn’t bother them, you can make a strong case that covered-call ETFs don’t add value,” he says. “But clients aren’t robots.”
Many want exposure to riskier assets but struggle with volatility, and covered-call premiums help them stay invested, he says.
He points to the CI Gold+ Giants Covered Call ETF CGXF-T with an 8-per-cent to 10-per-cent annual yield that helped clients remain patient from 2019 to 2024 with a play on gold’s potential upside when the price for the precious metal wasn’t moving much.
When gold miner prices took off in 2025, the comparable non-covered call VanEck Gold Miners ETF GDX-A had a 40-percentage-point advantage over CI’s covered-call ETF.
“But how many investors would have had the patience to sit on a sector with a low yield and flat growth from 2019 to 2024?” he says.
Still, Mr. Lenehan only employs the strategy for sector exposures and with ETFs writing calls on about a third of the portfolio, so most of the upside remains.
Mr. Felix agrees that the use case for covered-call ETFs is more psychological than mathematically sound.
“There’s a mental accounting bias that favours income,” he says.
Yet, he wonders if that affinity will hold over longer spans.
“In the grand scheme of things, total returns are what really matter.”