It’s hard to stretch your yield without taking on a considerably greater amount of risk, especially if we’re talking about individual stocks. And while ETFs can help dampen the blow of a dividend cut (of one or a few of the ETF’s holdings), investors must know the trade-offs to score that higher yield. When it comes to various covered call ETFs that have gone live on the TSX Index in recent years, one can raise their yields without having to put one’s wealth directly in harm’s way.
Of course, distribution reductions are still a risk. After all, the total dividend collected by an ETF is only as good as the holdings that make up the basket. With covered calls, there’s another layer of income added on top in the form of options premiums. These, of course, come at a cost. And in the case of covered calls, the cost is the potential upside.
If your goal is passive income, rather than capital gains potential, and you’re willing to settle for an uncertain total return (that’s capital gains and dividends) if it means having your distributions do far more of the heavy lifting, the following yield-rich ETFs seem worth exploring as a part of a diversified income strategy.
Enter the Global X line of covered call ETFs, which are intriguing and add a lot to the table for those willing to pay a slightly higher price of admission (MERs) for the extra distributions, which are paid monthly.
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Global X Canadian Oil and Gas Equity Covered Call ETF
Global X Canadian Oil and Gas Equity Covered Call ETF (TSX: ENCC) is a standout covered call ETF because of its gigantic 13% yield. It’s the real deal, but investors should understand what goes into making it so towering. As the name of the ETF suggests, the ETF invests in Canadian oil and gas producers, some of which you may already be exposed to. What’s more, the ETF leverages an active strategy that entails selling calls on some holdings to generate even more cash flow. That cash flow goes on top of the dividends and is paid out to investors.
The main takeaway is that the ENCC isn’t going to be the optimal way to bet on oil and gas, especially if you’re a massive energy bull. For maximum upside, you’d want to own the energy stocks themselves. What the ENCC is great for, though, is for those who want to get paid in monthly cash flows for their bets on energy and gas names. If you want capital gains or total returns, perhaps look elsewhere. But for those who prioritize income and are bullish on the energy sector as a whole, the ENCC is compelling.
Do note that the yield can fluctuate, sometimes quite wildly, and that there is a bit of yield uncertainty at times, so do prepare for a moving target, so to speak. It’s not the dividend holdings themselves that are prone to wild changes, but the magnitude of income generated by the option strategy. In short, the premium amount will vary depending on the month.
In any case, the ENCC is up 10% year to date, actually outpacing the S&P 500, while spoiling investors with the huge distribution.
