Hating on Covered calls
I was accused of cherry picking my data about Return Of Capital when talking about covered calls in my recent posts. Truth is, I am still trying to learn as much as I can about this topic and I am just sharing what I am learning.
But maybe they were right..... so lets dig into the data..... I looked at the 100 most bought ETFs here on Blossom using the Markets section and separated out all of the covered call ETFs.
That left me with a list of 28 covered call ETFs so I built a chart that listed each ETF's distributions over the past 24 months or since inception, and compared it to the Total Return.
This is the strategy used to figure out if the Distribution is eroding the Net Asset Value. Basically it means your money is just coming back to you in order to maintain the distribution yield if the total return is less than the distribution. This is not good and would be considered a bad form of ROC (Return of Capital) because you are basically paying fees for somebody to send your investment back to you.
Here are the results:
Over the past 24 months or since their inception date, 12 out of the 28 Covered Call ETFs have had destructive NAV and Bad ROC meaning that they are just returning your money back to you.
MSTE (TSX) – Harvest MicroStrategy Enhanced High Income: -91.5% Total Return | 158.2% Annualized Yield (Since Inception | Destructive ROC Gap: +249.7%)*
MSTY (US) – YieldMax MSTR Option Income Strategy: -74.2% Total Return | 94.5% Annualized Yield (Since Inception | Destructive ROC Gap: +168.7%)*
ULTY (US) – YieldMax Ultra Option Income Strategy: -42.8% Total Return | 88.6% Annualized Yield (Since Inception | Destructive ROC Gap: +131.4%)*
TSLY (US) – YieldMax TSLA Option Income Strategy: -38.5% Total Return | 54.4% Annualized Yield (2-Year History | Destructive ROC Gap: +92.9%)
CONY (US) – YieldMax COIN Option Income Strategy: -12.4% Total Return | 68.2% Annualized Yield (2-Year History | Destructive ROC Gap: +80.6%)
TSLY (TSX) – Harvest Tesla Enhanced High Income: -8.1% Total Return | 32.5% Annualized Yield (2-Year History | Destructive ROC Gap: +40.6%)
YTSL (TSX) – Purpose Tesla Yield Shares ETF: -2.5% Total Return | 31.2% Annualized Yield (2-Year History | Destructive ROC Gap: +33.7%)
HBTE (TSX) – Harvest Bitcoin Leaders Enhanced Income: +14.1% Total Return | 34.8% Annualized Yield (Since Inception | Destructive ROC Gap: +20.7%)*
HHIS (TSX) – Harvest Diversified High Income Shares: +11.2% Total Return | 30.1% Annualized Yield (Since Inception | Destructive ROC Gap: +18.9%)*
QDAY (TSX) – Hamilton Enhanced Technology DayMAX: +8.5% Total Return | 19.5% Annualized Yield (Since Inception | Destructive ROC Gap: +11.0%)*
PLTE (TSX) – Harvest Palantir Enhanced High Income: +32.6% Total Return | 34.2% Annualized Yield (Since Inception | Destructive ROC Gap: +1.6%)*
ETHY (TSX) – Purpose Ether Yield ETF: +18.2% Total Return | 19.1% Annualized Yield (2-Year History | Destructive ROC Gap: +0.9%)
BTCY (TSX) – Purpose Bitcoin Yield ETF: +24.8% Total Return | 21.8% Annualized Yield (2-Year History | Sustainable ROC Gap: -3.0%)
ENCL (TSX) – Global X Enhanced Cdn Oil & Gas: +21.5% Total Return | 12.4% Annualized Yield (2-Year History | Sustainable ROC Gap: -9.1%)
NVDY (US) – YieldMax NVDA Option Income Strategy: +68.5% Total Return | 58.5% Annualized Yield (2-Year History | Sustainable ROC Gap: -10.0%)
QQCL (TSX) – Global X Enhanced NASDAQ-100: +28.4% Total Return | 11.8% Annualized Yield (2-Year History | Sustainable ROC Gap: -16.6%)
QQQI (US) – NEOS Nasdaq 100 High Income ETF: +32.2% Total Return | 13.6% Annualized Yield (2-Year History | Sustainable ROC Gap: -18.6%)
BIGY (TSX) – Evolve US Equity UltraYield ETF: +33.5% Total Return | 11.2% Annualized Yield (2-Year History | Sustainable ROC Gap: -22.3%)
UTES (TSX) – Evolve Canadian Utilities Enhanced: +31.0% Total Return | 8.5% Annualized Yield (2-Year History | Sustainable ROC Gap: -22.5%)
USCL (TSX) – Global X Enhanced S&P 500 Covered Call: +35.8% Total Return | 10.5% Annualized Yield (2-Year History | Sustainable ROC Gap: -25.3%)
ECHI (TSX) – Ninepoint Enhanced Canadian HighShares: +36.2% Total Return | 10.1% Annualized Yield (2-Year History | Sustainable ROC Gap: -26.1%)
YNVD (TSX) – Purpose NVIDIA Yield Shares ETF: +58.4% Total Return | 28.4% Annualized Yield (2-Year History | Sustainable ROC Gap: -30.0%)
HDIF (TSX) – Harvest Diversified Monthly Income: +41.0% Total Return | 10.2% Annualized Yield (2-Year History | Sustainable ROC Gap: -30.8%)
ZWC (TSX) – BMO Canadian High Dividend Covered Call: +38.5% Total Return | 6.3% Annualized Yield (2-Year History | Sustainable ROC Gap: -32.2%)
HYLD (TSX) – Hamilton Enhanced U.S. Covered Call: +46.2% Total Return | 12.0% Annualized Yield (2-Year History | Sustainable ROC Gap: -34.2%)
BANK (TSX) – Evolve Canadian Banks Enhanced Yield: +48.5% Total Return | 10.2% Annualized Yield (2-Year History | Sustainable ROC Gap: -38.3%)
HMAX (TSX) – Hamilton Canadian Financials Yield: +51.2% Total Return | 10.9% Annualized Yield (2-Year History | Sustainable ROC Gap: -40.3%)
HDIV (TSX) – Hamilton Enhanced Multi-Sector: +59.8% Total Return | 10.8% Annualized Yield (2-Year History | Sustainable ROC Gap: -49.0% | Best ROC)
It looks like single stock ETF's generally have the worst ROC of the bunch. Seems like they take the full downside when a stock falls and the options limit the upside in exchange for cash flow.
Broad Multi-Sector funds targeting 8-12% distributions seem the most sustainable as they provide both upside in appreciation but also sustainable distributions that do not erode the fund.
The best overall performers were HDIV HMAX HYLD and BANK
As far as I can tell it looks like almost half of the most popular covered call ETF's on Blossom are sending your own money back to you..... with fees and sometimes taxes.....
And I can't find a single ETF in this list where the covered call version has outperformed the same asset without covered calls.
I love the idea of income, especially if it is needed for monthly expenses but it just makes me think that what we really need is for Wealthsimple and Questrade to launch an Automated Withdraws feature in a way that would give investors a similar result without the fees and upside limits of Covered Call ETFs.
What are your thoughts? If you could setup automated withdraws in a way that worked similar to receiving a distribution from a covered call ETF would that be an appealing option to covered call investors?
What am I missing?
PS. If someone (including me) is wrong about something, kindly point out the mistake and the correct information. Dont be a prick.
