Option-based ETFs include covered-call, put-write, defined-payoff, buffer, collar and other combinations of strategies.tadamichi/iStockPhoto / Getty Images
Option-based exchange-traded funds are growing in popularity, with the number of product options for yield-hungry Canadian investors multiplying over the past year.
“Canadian investors have an insatiable thirst for yield,” says Daniel Straus, managing director of ETFs and financial products research at National Bank Capital Markets.
Last year was a banner year for ETFs in Canada, with a record $125-billion in inflows. One of the hottest categories was option-based ETFs, which received new investments of $11-billion, a 74 per cent increase from the year before, which marks a “sea-change” in demand, according to a January report from National Bank Financial. Option-based ETFs in Canada reached $41-billion in assets under management spread across more than 300 products.
Option-based ETFs include covered call, put-write, defined-payoff, buffer, collar and other combinations of strategies. But Mr. Straus notes most are covered-call ETFs: of the $41-billion AUM currently in option-based ETFs, more than $35-billion is in covered-call funds.
A covered-call ETF holds a portfolio of stocks while simultaneously selling (writing) call options on those holdings to generate income from premiums. The strategy is designed to boost yields and reduce volatility.
Mr. Straus says the relatively high distribution yield of covered-call ETFs comes with important trade-offs. On the behavioural side, covered-call ETFs take some of the cash-flow decisions out of the day-to-day logistics of selling to generate cash flow.
Depending on the type of distribution, covered-call ETFs might be tax-advantaged as well.
He believes the recent rise in covered-call ETFs comes from self-directed investors using discount-brokerage platforms who are attracted to option-based covered-call ETFs with embedded “light” leverage (about 25 per cent cash borrowing), very aggressive option overwriting, or a combination of both.
These trends have translated into a big jump in inflows into ETFs with high payout rates: $1.4-billion, or 74 per cent of single-stock ETF flows last year, went into ETFs with a distribution yield of 24 per cent or more, according to National Bank Financial.
Mr. Straus says a big driver of the category’s growth in 2025 came from the proliferation of single-stock ETFs. He notes Harvest Diversified High Income Shares ETF HHIS-T, which invests in a basket of Harvest Portfolios Group Inc.’s single-stock ETFs, accounted for $1.2-billion of the category’s inflows.
Single-stock ETFs concentrate their investments in one specific company’s shares, often using derivatives to provide leveraged or inverse daily returns. They have attracted attention as a leveraged way to bet on the price direction of specific – often higher-profile – stocks. As such, they’re best used for short-term trading and as a small portion of overall portfolios.
Paul MacDonald, president and co-chief investment officer at Harvest ETFs in Oakville, Ont., says the significant growth in option-based products “is no accident.”
“We’ve seen growing interest largely because investors are looking for ways to generate reliable cash flow in a market that’s been anything but predictable,” he says. “Option-based strategies can help bridge that gap.”
Mr. MacDonald notes that option-based funds allow investors to stay invested in equities they understand, while adding an additional source of income that isn’t dependent solely on price appreciation.
Harvest ETFs has two main categories of option-based strategies: its core equity income strategies and its high-income, single-stock funds.
Within the core equity income strategies, fund managers write call options and sometimes put options on core large- and mega-cap stocks. The high-income funds write monthly call options on a single stock, using up to 25 per cent leverage.
Mr. MacDonald says that, like any investment strategy, there are trade-offs. Writing options can limit upside participation in strong bull markets, and the funds remain exposed to equity market risk. The funds that use leverage can have high volatility.
For most investors, he says, option-based strategies are best used as a component of an overall diversified portfolio. For more income-dependent investors, they can make up a larger percentage.
Chris Thom, chief executive officer of portfolio management firm Moat Financial Ltd. in Vancouver, says there’s no mystery to option-based products’ popularity.
“Canadians love the additional income that option-based strategies can add to their portfolios, without adding downside risk,” he says. “Covered calls took a long time to gain traction, but once the market accepted the strategy, they have taken off like wildfire.”
Mr. Thom’s firm launched MOAT Active Premium Yield ETF MOAT-T last month with LongPoint Active Management Inc. The fund primarily sells cash-covered puts on a diversified portfolio of North American equities.
Despite not using leverage, its current annualized yield is 11.97 per cent, “and that is with meaningful downside protection built in,” Mr. Thom says.
He says the fund’s risk level is lower than just buying stocks and lower than a covered-call strategy.
The fund has seen interest from investors who have benefitted from the rise in the stock market and want to take some money off the table, but don’t want to move all the way to fixed income, which offers low yields currently, he says.