How investors can benefit from covered call ETFs

With markets in a state of flux after the recent correction, covered call option strategies can offer investors higher yield with reduced exposure to volatility.

That’s the view Daniel Stanley, Director, BMO ETFs takes, who says investors can benefit from its “light-touch” approach. He says BMO sets out to own a basket of underlying stocks, focusing on dividend grower stocks that provide higher quality and a more stable source of income.

“Then, with that basket, we write out of-the money calls on roughly half the portfolio,” Stanley said. “The end result is that investors are able to collect dividends supplemented by call premiums, while getting full market participation on half the portfolio, and market participation up to the strike price on the written portion.”

Stanley believes this approach can offer four major benefits to investors: a higher level of yield than just owning the underlying stocks; tax efficiency; a premium level of income in flat markets; and lower volatility.

He says the ETFs set BMO apart from competitors, especially in the current environment.

 “The single biggest attraction to covered call options strategies right now is demographics. There’s an enormous need for income out there and a portfolio of bonds or fixed-income investments just isn’t able to satisfy that need for income that a lot of our clients have.”

“The other reason just has to do to with market conditions. If you do believe that we’re at the tail-end of the bull market, then these strategies can give you a higher yield as well as ownership of the underlying, but with a little less volatility than outright owning stocks.”

BMO Canadian High Dividend Covered Call ETF recently celebrated its one-year anniversary, and Stanley believes that investors with the right risk tolerance can move forward confidently with this product.

“If the bull market continues, these ETFs will capture roughly 80% of the upside,” he said. “If the market is flat, our covered call ETFs should outperform the market because they are getting that call premium. Also, if the markets are down, while exposed to the stock’s downside, our covered call strategy should outperform the strategy of just owning the underlying stocks because you are collecting that premium.”

With a plethora of ETF companies now operating in Canada, competition has gone through the roof. Working with established providers and using innovative and effective products has been crucial for advisors who want to differentiate themselves from the crowd. 

“We have to be innovative in creating products that benefit and help our clients,” Stanley said. “But it’s not just about products, you have to be in front of your clients, explaining how ETFs work, helping them, and answering their questions quickly. We recognize that, in this world of robo advisors and everything going online, the value of customer service is still very, very high.”

BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp. and BMO’s specialized investment management firms. BMO ETFs are administered and managed by BMO Asset Management Inc., an investment fund manager and portfolio manager and a separate legal entity from the Bank of Montreal. 

This article is for information purposes. The information contained herein is not, and should not be construed as, investment advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus before investing. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated. 

 “BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under licence.


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