Covered Calls: A Devil's Bargain

The idea that covered calls generate income is financial bulls***. These strategies are mechanically expected to underperform their underlying equity, and increasingly so at higher targeted levels of distributions.

For long-term investors, covered calls increase risk by leaving the downside unprotected while the capping upside, eliminating the mean-reverting behavior of stocks - an important feature of stock returns.
------------------
*Meet with PWL Capital* https://pages.pwlcapital.com/en-ca/contact-us?utm_source=content&utm_medium=youtube&utm_campaign=benfelix_yt

*Correction* the comparison at 9:56 is not good. While the names are similar, the BMO Equal Weight Utilities Index ETF (ZUT) and the BMO Covered Call Utilities ETF (ZWU) have different underlying holdings. The language in the ETF Facts for ZWU threw me off: _"Currently, the ETF invests in BMO Equal Weight Utilities Index ETF."_ The BMO Equal Weight Utilities ETF is 92.5% in Canadian stocks and the BMO Covered Call Utilities ETF is only 60% Canadian (with the remainder in the U.S. in both cases). This is obviously a big difference and an oversight in making the comparison, but the BMO Equal Weight Utilities ETF (92.5% Canadian) returned an annualized 7.65% from November 2011 to August 2025 while the Invesco S&P 500 Equal Weight Utilities ETF returned an annualized 10.94% (in USD since ZWU hedges to CAD) over the same period. The U.S. exposure would have helped, not hurt, the BMO Covered Call Utilities ETF relative to ZUT over this period. While not a great comparison, the conclusion grows stronger, not weaker when this correction is made.

*References* https://zbib.org/7e708059a42b4a73bbf093b9c6547e69

*Avoid Online Scams* https://pwlcapital.com/stay-safe-online/

*Rational Reminder Podcast*
YouTube channel @rationalreminder
Podcast website https://rationalreminder.ca/
Rational Reminder community (forum) https://community.rationalreminder.ca/
Apple Podcasts https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582?mt=2
Spotify https://open.spotify.com/show/6RHWTH9iW7hdnA7eAg7ukO?si=hjZNfLKuSjSeWX38GPqhVA