Clearing Up Confusion: Covered Call ETF Dividends & Repurchases

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This video unmasks some more misconceptions about covered call ETFs. If you have actually ever been confused about how work or fretted that the fund will lose cash when shares are called away, then you won't want to miss this!


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Clearing Up Confusion: Covered Call ETF & Repurchases

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  1. Investing in covered call ETFs but have concerns about how they work? This video is for you. We address common misconceptions and debunk myths about not getting your dividends and the repurchase of shares at higher prices.

    1. I don’t see that being an issue. Most of these hold big blue chip stocks with a very liquid options market. My problem is that the management fees are high and these seem to typically underperform their index etf counterparts.

    2. The options market is very robust, and with the large cap, liquid holdings these funds use, it’s hard to imagine it being an issue. Good question. – Marc

    1. Hey Bradley. Obviously apples and oranges. The options overlay pretty much changes everything, including the reason you’d hold the underlying assets. – Marc

    2. @Brandon Beavis Investing thanks! so if the funds are in and out of stocks but gaining value from the options, does the price more follow the underlying assets or is the price movement correlated closer to the income that’s being generated by the options

  2. Question; I’ve been wanting to put some money into one of the many covered call ETF’s out there for the high yield and low cost to create more cash flow in my TFSA, but not to re-invest them back into the ETF but purchase more individual equity stocks (blue chip, dividend payers) with it. My issue is with a lot of them especially the ones that use leverage the NAV and ultimately the performance just deteriorates over time, which leads me to believe the massive yield is just eating at the ROC and without re-investing the dividends it’s just losing value year over year. If this is true, maybe the real reason or use for them is simply the high yield for cash flow but one shouldn’t expect them to grow with no re-investments of dividends or additional money ? Would you use one just for the purpose of growing your more valuable long term holdings ?

  3. Thanks! A good example is ZWB from BMO. It’s been around since 2011 and provides a nice regular monthly income without losing its value. Not a growth stock, but it’s not their purpose. Not all are created equal, it depends on the covered call strategy of the fund.

    1. You know it, right? There are lots of choices/strategies out there, so you can’t paint everything with the same brush. Thanks for taking the time to comment. – Marc

  4. Great explanation.

    I prefer to apply covered call strategies on my own on blue-chip stocks. With multi leg, we can buy 100 shares and write an ITM option to get a safe return.

    JNJ @$97 for 100 shares with interest / premium yields 9% on a 1 year contract. ITM contracts usually don’t get called away…

    Before the year is up. I will roll over to a higher strike / premium to eventually own the shares outright.

    1. Thanks for sharing your strategy. Sounds like you’ve got a good grasp of the way things work. – Marc

  5. Great video Marc! I think a lot of Covered Call ETF investors are completely unaware of how the math works. Hopefully after this video, there are less of those folks out there.

  6. My biggest concern with covered calls is that they don’t provide much value in reality, while the funds cost order of magnitudes more than regular indexed ETFs. The distributions are also either unreliable, or simple a return of capital. During bull markets, CC ETFs will underperform, while in sideways or bear markets, the distributions will be cut as premiums for call options decrease. These ETFs feel like just another gimmick designed to get people into more expensive investment products

    1. I respect your opinion. Some of what you say might be true, some might fall into the camp of commonly misunderstanding of how these funds work. And, most importantly, not all high yield or covered call ETFs are run the same. You have to read the prospectus of each one so that you know the nuances and what you are owning. And a bear market doesn’t mean the premiums for call options will decrease. That’s related to volatility, not necessarily direction. – Marc

  7. You forgot the scenario where you are down to that one share then the price goes back to $50 then you have half the value you started with (aside from the $2 premium collected)….

    1. That’s why I emphasized a number of times in the video that that example was only to simplify the math, but it wasn’t realistic in real life. That was the whole point of showing that example. – Marc

    2. @Brandon Beavis Investing It is true though that it can cause one to sell the CC low and to rebuy high, then the stock price can revert. I think it’s always important to highlight that a CC fund TR will always underperform overall vs the underlying.

    3. Absolutely, that scenario is possible. In fact, there are unlimited potential scenarios. Hopefully understand the concept of how the math works will allow each individual to apply the math to their own situation and projections. Thanks. – Marc

    4. @Brandon Beavis Investing Well actually, if we assume assignment (if price breaches strike), then there are only 6 fundamentally possible scenarios with an ATM call. Price goes up, stays flat, or goes down upon selling the CC, then the same 3 price movement possibilities following assignment.

  8. Wow Marc , thanks for the special video to explain the math and mechanics for these covered call investments ! Aha!

  9. 10:54 why is the yield 5% for both? It was 5% @ $50 but at $53, your yield is 4.7%. $102,979 * 4.7% = $4,840.01…… not what is shown on the screen. Like you mentioned earlier in the video, the stock would have to raise it’s dividend first for you to make money but until it does increase, you’ve lost money each dividend payout.

    AND some companies only increase their dividend once a year – if you sell calls for 30 days, that’s many occurrences of you losing money if the calls are exercised. I can image 30 days is just in your example and not how long real calls last for, maybe. If HMAX’s calls (banks stocks) are over a year then that would fix that.

    Can you please correct me where I’m wrong, if I am. Thanks 🙂

    1. You’re not wrong. And obviously, this video couldn’t cover every possible scenario, nor was the intent. The intent was to simplify the math, and then each investor can take that and apply it to their own scenarios. Hopefully the conceptual framework will help some people understand better. Appreciate you taking the time to add your comment to the discussion. – Marc

    2. ​@Brandon Beavis Investing I REALLY LOVED the video as it did help me understand CC funds better…. but it feels like the video artificially made the Covered Call Strategy look good by making the before and after yield both 5% and the “after” value higher than it should be (assuming no dividend increase). In my opinion, this video would have been PERFECT if at the end, you showed 4.7% = $4,840 and said that if the yield stays like this for too long, the fund will lose capital or risk lowering the yield (I think???) until the underlying stocks increase their dividend. That would highlight the risk with these covered call funds.

      Or maybe I’m being too hard haha sorry about that. Obviously this took a lot of work and 98% was amazing 🙂 but my OCD focuses on that last part 🙁

    3. Fair enough.. My goal was to illustrate how things worked over a normal (long) time period, however I totally accept your comment. Thanks for adding. – Marc

  10. I was following your explanation till about half way through….😢. I am trying so hard to understand it all, want to grow my wealth to support my retirement!

    1. I know, eh? The math isn’t simple to follow. Thanks for watching, though, and keep on learning! – Marc

  11. Thank you for breaking down a few scenarios to elaborate on the math behind the covered call strategy that seems to be common as I am slowly learning more about investing at the start of this year!

    I have a suggestion for the video where you’ve overlaid questions for the viewers, which was using a light grey colour font, across the bottom middle of the screen. The question was a little lost based on your shirt colour so perhaps in future videos it would be helpful to have a higher contrast colour behind the font (shirt colour) or simply a coloured box behind the questions.

    Cheers from a friendly new viewer!

    1. Hey Dustin. Thanks for your suggestion; I appreciate that. And thanks for watching and taking the time to comment. – Marc

  12. Thanks for this. I’m not sure example 1 helped an awful lot though – as others have said, if the share price suddenly doubles then the dividend will likely half. I know you said it’s not a realistic example but still. The second one was better.

    1. Fair enough. The first example was to try my best to simplify the math, conceptually. Agreed, it would never happen in real life. Thanks for watching. – Marc

  13. I like this idea of taking questions from comments to provide great clarity! Thank you!

    1. Thank you. I know some people don’t like it when we reply to comments in videos, but I agree that the comments can provide us with a lot of info on what our viewers want to know. Really glad you felt it was valuable here. Cheers. – Marc

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