Covered-call funds have existed for some time, yet investor interest in them has soared over the past year
. These products pulled in $4.2-billion worth of net inflows in Canada last year, according to research from CIBC World Markets, amounting to roughly 25 per cent of new money invested in the equity ETF sector.
Because of this dynamic investors won’t beat a hot market with these funds. Covered calls shine when the market is going sideways or is slightly negative. Investors also may not realize that funds with similar strategies can generate divergent returns. “Depending on the fund manager, option writing strategies can vary greatly and deliver different results,” CIBC World Markets analysts Jin Yan and Ian de Verteuil wrote in a recent report to clients.
A new fund from Hamilton ETFs, one of Canada’s leading covered-call providers with more than $800-million in assets under management, illustrates how these strategies can differ. The Hamilton Canadian Financials Yield Maximizer ETF, known as, targets a payout yield of 13 per cent annually and it does so in part by writing options on 50 per cent of its holdings.
. Over the past five years, the fund has delivered a total return of 36.3 per cent, or 6.5 per cent annually., which does not write any options, delivered a total return of 51 per cent, or 8.7 per cent annually, over the same period because Canada’s bank shares mostly rose during that window.
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