STOCKS AND OPTIONS
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February 10, 1: The first covered call ETF hit the Canadian marketplace a year ago and was welcomed by income-seeking investors.
Unfortunately, those investors are still seeking. When covered call ETFs arrived, equity etf and option trades timing was perfect. Low bond yields and tumultuous equity markets had scuppered many a retirement plan.
Into this income vacuum, products such as mortgage investment corporations and limited partnership structures had appeared. Covered call ETFs were a sensible addition. The tantalizing mix of capital gains and income offered by these ETFs helped them quickly grow.
Whether they keep growing depends on whether they fulfill their promise. An ETF of, say, three stocks writes sells call options on the three firms at a equity etf and option trades strike price and for a premium. The ETF collects the premium from the sale. That is, if the market price of the stock is higher than the strike price, the ETF will be obliged to sell the stock for the agreed strike price and then buy it back at the higher market price.
To minimize the chances of being called away, the ETF manager sells call options at a strike price that is higher than the prevailing market price. This works well if stock prices are ticking up steadily and slowly. However, it does not work so well when markets are choppy, as they were for much of The performance of a couple of covered call ETFs proves the point. HEX writes call options on most of its portfolio, usually with a one-month maturity and at a strike price slightly higher than the prevailing market price.
Since its start last March, HEX earned dividends and call premiums totalling But its price fell about Using data from Horizons, I constructed a portfolio of the same equity etf and option trades stocks on Bloomberg, taking into account the rebalance last September.
This plain portfolio returned The balance is invested in plain ZEB. In the last 12 months ZWB fell by 8. Plain ZEB fell only 1. Again the plain version beat the covered.
One argument in favor of call writing is it helps smooth returns, especially in choppy or falling markets. True, both covered call ETFs have slightly lower volatility than the plain versions, but not enough to be meaningful. Are equity etf and option trades times when it makes sense to own covered call ETFs? Yes, if you expected, with some certainty, that markets would rise slowly but steadily over the next year or so.
But then, if you had that kind of certain information, there are better ways to make even more money. The author may hold positions in securities mentioned in this report. I ncorrect returns that appeared in an earlier version of this equity etf and option trades have been corrected. Filed under Investing ETFs. Not that long ago lithium was the it-mineral but miners are finding it harder to raise capital now that fears of over-estimated electric-car uptake have crept onto the scene.
Maryanne and Albert can have a very comfortable retirement if they maintain their modest way of life for another two decades. If you are not astronaut material, fear not, Aurora Station, billed as the "first luxury hotel in space," may be for you. Find Financial Post on Facebook.