This ETF category could shine if “global macro doesn’t deliver”

A covered-call ETF could perform well in 2023 if the market doesn’t get a V-shaped recovery, speakers said at the recent ETFGI Global ETFs Insights Summit Canada.

“When we talk to advisors, a lot of them have said they have not had good experiences with covered-call funds,” Raj Lala, CEO of Evolve ETFs, said at the summit. In a bull market, the investor is usually better off holding the underlying equity — but next year “could be strong” for covered-call funds, Lala added.

If the current market cycle is “down like an elevator [and] up like an escalator, then covered-call ETFs should continue to do well into 2023 and beyond,” said Trevor Cummings, vice-president of ETF distribution with TD Asset Management Inc., at another session.

Covered calls — a strategy which involves selling someone the right to buy a security at a fixed price for a fixed term — do well when “optimism rises, but maybe global macro doesn’t deliver,” Cummings said. He added that about 10 fund providers, including TDAM, offer covered-call ETFs in Canada.

The category has about $16 billion in assets in Canada, said Mark Noble, executive vice-president of ETF strategy with Horizons ETFs Management (Canada) Inc., at another session. (Overall ETF assets totalled $318.7 billion as of Nov. 30, according to National Bank Financial Markets.)

The “big push” to invest in covered-call ETFs comes from investors wanting income “in the absence of getting a larger return,” Noble said.

ETFs that write call options on fixed-income securities are “minting money hand over fist” because they are selling options to investors who are anticipating a “pivot” in the market, Cummings said at the summit, adding that he is not aware of anyone anticipating a V-shaped recovery.

One covered-call ETF in particular has attracted great interest in 2022. For the year to Nov. 30, the BMO Covered Call Canadian Banks ETF had inflows of $642 million, the 17th-highest inflow among ETFs over the period, according to National Bank Financial Markets.

The ETFGI Global ETFs Insights Summit Canada was held in person in Toronto on Nov. 30 and continued virtually on Dec.1.