Confused?: Covered Call ETF Dividends & Repurchases

[@terrylevine]

Omg. Thank you for this. This is the first time I’ve never truly understood the mechanics of options and covered calls. I’ve tried to watch other videos and no one has explained it clearly. Kudos. Great job! 🎉

[@beaviswealth]

Thanks, Terry. - Marc

[@travisloewen6191]

I really like this format of addressing comments from previous videos. The only thing I would add is that in these scenarios, the dividend is unlikely to be raised that quickly to try and keep the DPS ratio consistent. The first 6-12 months would probably have a smaller dividend yield until the company raises the dividend. Or, if the share price returns to its previous price, the dividend might stay the same and the overall yield will be lower (but the next covered calls won't get exercised). Do you know if any funds roll the calls up and out instead of letting them expire in the money?

[@beaviswealth]

Investing in covered call ETFs but have concerns about how they work? This video is for you. We address common misconceptions and debunk myths about not getting your dividends and the repurchase of shares at higher prices.

[@danielpicard3994]

After reading for months in regards to that subject (covered call strategy), I finally get it! Thank you for making this clear to me by using easy to understand examples. 😊

[@muddywatersbookshelf7758]

I like this idea of taking questions from comments to provide great clarity! Thank you!

[@beaviswealth]

Thank you. I know some people don't like it when we reply to comments in videos, but I agree that the comments can provide us with a lot of info on what our viewers want to know. Really glad you felt it was valuable here. Cheers. - Marc

[@MegsCarpentry-lovedogs]

I agree. It adds value and quality to the purpose of the channel and Marc's work, attention to detail and his experience. You could say that it is like a very nice "dividend" for the time we invest out of our busy day to watch, click and subscribe☺ 🇨🇦

[@MountainFinance]

Great video Marc! I think a lot of Covered Call ETF investors are completely unaware of how the math works. Hopefully after this video, there are less of those folks out there.

[@beaviswealth]

Thanks. Hope it helps at least a few understand. Cheers. - Marc

[@dominiquetheeasyminimalist]

Thanks! A good example is ZWB from BMO. It’s been around since 2011 and provides a nice regular monthly income without losing its value. Not a growth stock, but it’s not their purpose. Not all are created equal, it depends on the covered call strategy of the fund.

[@beaviswealth]

You know it, right? There are lots of choices/strategies out there, so you can't paint everything with the same brush. Thanks for taking the time to comment. - Marc

[@twfinc6855]

yes I like the proven track record of ZWB, I own it.. Some of the hamilton efs they mention in other videos on here are only out for a couple years, or even less. That scares me a bit

[@johnmcquaid7524]

My 1st decision of the day; with regards to this subject. Is this the: Best video ever or Greatest video ever?

[@MichaelKeen-y3r]

Hey Marc I recently contacted Hamilton regarding HMAX and had a conversation with Louis Rebieras. I had the same concerns as many of your viewers, ie if called away did they have to repurchase at a higher price and potentially miss a monthly dividend. The way he explained it to me (and I hope I have this right, new to options) was that they don't actually have to surrender the shares, rather they can pay the holder in cash. The example he gave was that if they held 2 stocks at $50 with a call at $51 and the stocks ran to $100 they would pay the holder the $51 and still have the stocks and therefore the gains. I hope I have this right, perhaps you could address it in a future video. Thanks for your work. best Michael

[@beaviswealth]

Hi Michael. Awesome that Louis was able to converse with you directly. The reality is, in probably most cases the shares aren't don't get 'called away', rather the settlement is in the manner he described. That's a whole topic for another video, but at the end of the day, the math should be pretty much the same. Thanks for watching and asking your question. - Marc

[@mustafaal-humairi6477]

Incorrect they have to options either to surrender the shares for 51 dollars and they use the 51 dollar's to pay the shareholders or roll the options calls to another expiry and since the call will be deep in the money they will not receive any credit for it. Third option of-course to re purchase them at 100 or purchase les shares

[@henryhunter5419]

@@mustafaal-humairi6477 Typically, when you roll out an option further into the future at the same strike price, you receive a net credit, even if the call option is in the money. Sometimes, you have to roll out a little further in time to make it worth it.

[@MegsCarpentry-lovedogs]

Michael, glad you have joined the conversation with this astute audience. The comments are most enlightening and educational....not to mention they give Marc some insight from his audience about what to clarify...so...new material for another one of his exceptional presentations 👍🇨🇦

[@themusic6808]

Question; I’ve been wanting to put some money into one of the many covered call ETF’s out there for the high yield and low cost to create more cash flow in my TFSA, but not to re-invest them back into the ETF but purchase more individual equity stocks (blue chip, dividend payers) with it. My issue is with a lot of them especially the ones that use leverage the NAV and ultimately the performance just deteriorates over time, which leads me to believe the massive yield is just eating at the ROC and without re-investing the dividends it’s just losing value year over year. If this is true, maybe the real reason or use for them is simply the high yield for cash flow but one shouldn’t expect them to grow with no re-investments of dividends or additional money ? Would you use one just for the purpose of growing your more valuable long term holdings ?

[@dtwong1]

Thank you for breaking down a few scenarios to elaborate on the math behind the covered call strategy that seems to be common as I am slowly learning more about investing at the start of this year! I have a suggestion for the video where you've overlaid questions for the viewers, which was using a light grey colour font, across the bottom middle of the screen. The question was a little lost based on your shirt colour so perhaps in future videos it would be helpful to have a higher contrast colour behind the font (shirt colour) or simply a coloured box behind the questions. Cheers from a friendly new viewer!

[@beaviswealth]

Hey Dustin. Thanks for your suggestion; I appreciate that. And thanks for watching and taking the time to comment. - Marc

[@channelmovedseefeaturedcha3500]

10:54 why is the yield 5% for both? It was 5% @ $50 but at $53, your yield is 4.7%. $102,979 * 4.7% = $4,840.01...... not what is shown on the screen. Like you mentioned earlier in the video, the stock would have to raise it's dividend first for you to make money but until it does increase, you've lost money each dividend payout. AND some companies only increase their dividend once a year - if you sell calls for 30 days, that's many occurrences of you losing money if the calls are exercised. I can image 30 days is just in your example and not how long real calls last for, maybe. If HMAX's calls (banks stocks) are over a year then that would fix that. Can you please correct me where I'm wrong, if I am. Thanks :)

[@beaviswealth]

You're not wrong. And obviously, this video couldn't cover every possible scenario, nor was the intent. The intent was to simplify the math, and then each investor can take that and apply it to their own scenarios. Hopefully the conceptual framework will help some people understand better. Appreciate you taking the time to add your comment to the discussion. - Marc

[@channelmovedseefeaturedcha3500]

​@@beaviswealth I REALLY LOVED the video as it did help me understand CC funds better.... but it feels like the video artificially made the Covered Call Strategy look good by making the before and after yield both 5% and the "after" value higher than it should be (assuming no dividend increase). In my opinion, this video would have been PERFECT if at the end, you showed 4.7% = $4,840 and said that if the yield stays like this for too long, the fund will lose capital or risk lowering the yield (I think???) until the underlying stocks increase their dividend. That would highlight the risk with these covered call funds. Or maybe I'm being too hard haha sorry about that. Obviously this took a lot of work and 98% was amazing :) but my OCD focuses on that last part :(

[@beaviswealth]

Fair enough.. My goal was to illustrate how things worked over a normal (long) time period, however I totally accept your comment. Thanks for adding. - Marc

[@henryhunter5419]

@@doubledtv9102 I agree that the video may not have accurately reflected what would immediately happen; however, I believe the intent was to simplify the explanation. I am pretty sure the fund managers use sophisticated models to determine the appropriate strike prices using deltas (probability of being exercised) and theta decay to minimize the risk of being called away most of the time. The illustration also did not talk about all the times the covered calls expired worthless and just added to the value of the portfolio and lowered their average cost base of the shares. There are many option strategies the mangers could deploy to avoid being called away.

[@charlesarmstrong5260]

An excellent explanation. It would be good if you could do the same for a falling stock price. The stock is not called away as it drops from 50 to 48 and then to 46 in the next month, and so on. The calls and dividends are a credit to the value of the holding, but the stock itself is falling in value. How does this affect the return?

[@dwainemurawski]

Hey Mark how long should I hold an etf in my portfolio example Hmax

[@jumbothompson]

Great explanation. Just facts not opinions.

[@sm2c113]

I was following your explanation till about half way through....😢. I am trying so hard to understand it all, want to grow my wealth to support my retirement!

[@beaviswealth]

I know, eh? The math isn't simple to follow. Thanks for watching, though, and keep on learning! - Marc

[@northshorehighlanders6167]

Suggestions to sm2c: Use a computer. Easier to control playback. Run speed at 75%. Stop and replay "lost" moments repeatedly. Don't expect to "get it" with a single run-through. Use CC. Marc, can't thank you enough. Do you agree with looking at historical Sedar annual reports to see the progression of year-end NAVs, to help determine if distributions are/aren't eroding the fund? (Possible future video material, income-oriented ETF evaluation?) Great videos! (Downtown Vancouver, here.)

[@beaviswealth]

Thanks. I do believe that if you're owning a fund with a structure that is known for capital erosion, yes, you pretty much have to do the digging yourself to figure things out. It can be confusing, for sure. Thanks again. - Marc

[@djayjp]

You forgot the scenario where you are down to that one share then the price goes back to $50 then you have half the value you started with (aside from the $2 premium collected)....

[@beaviswealth]

That's why I emphasized a number of times in the video that that example was only to simplify the math, but it wasn't realistic in real life. That was the whole point of showing that example. - Marc

[@djayjp]

@@beaviswealth It is true though that it can cause one to sell the CC low and to rebuy high, then the stock price can revert. I think it's always important to highlight that a CC fund TR will always underperform overall vs the underlying.

[@beaviswealth]

Absolutely, that scenario is possible. In fact, there are unlimited potential scenarios. Hopefully understand the concept of how the math works will allow each individual to apply the math to their own situation and projections. Thanks. - Marc

[@djayjp]

@@beaviswealth Well actually, if we assume assignment (if price breaches strike), then there are only 6 fundamentally possible scenarios with an ATM call. Price goes up, stays flat, or goes down upon selling the CC, then the same 3 price movement possibilities following assignment.

[@ucanemaleme]

Hi Marc I’ve given covered calls a lot of thought and I wanted to know if the market gets too big (too much money in covered call etfs) will premiums for covered calls inevitably drop resulting in lower returns?

[@kbro7484]

What's your top five cc funds?

[@annehenderson462]

It’s all been said. Great and necessary vid. The detailed explanation with examples is greatly appreciated.

[@roberttaylor3594]

The dividend math works for me but the timing of the dividend increase doesn't. I doubt the payout rate is going to increase as fast as I am going to re-buy the shares. I expect if the price doubles, the payout rate of the underlying company is going to be $2.50 (5% of $50 but only 2.5% of the recently increased share price of $100) until at the VERY earliest, the next quarter, possibly two. The payout rate is going to lag behind the share price increase ( or decrease), but I am going to re buy shares a lot faster than that.

[@danderson5084]

Thanks for this. I'm not sure example 1 helped an awful lot though - as others have said, if the share price suddenly doubles then the dividend will likely half. I know you said it's not a realistic example but still. The second one was better.

[@beaviswealth]

Fair enough. The first example was to try my best to simplify the math, conceptually. Agreed, it would never happen in real life. Thanks for watching. - Marc

[@greggary7217]

I remain unconvinced that majority participation in the downside followed by 50% participation in the upside does not lead to erosion. I challenge you to make a weekly Graph of XMAX (from inception) and add a comparison of XFN in the same time period. I realize XMAX composition is somewhat different than the Capped TSX index but I believe it suffices as a proxy for this purpose. I believe it supports the thesis that a 50% upside is not sufficient to recover the downside. I’d be thrilled to be wrong, but so far I’m not seeing it.

[@Ben-vs4be]

What's happens if stock price drops below purchase price

[@arthurduncan3636]

By following example 2, it seems that the number of shares that the ETF owns will only go down as the stock price goes up, do ETFs ever buy back the lost stocks when the price of the stock go down? Or do they only buy them if their lost when the covered call is exercised?

[@beaviswealth]

Probably both, Arthur. If the price goes down and the contract isn't exercised, the won't buy the shares back, because they'd still own them. However, as new money flows into the fund they will buy additional shares, whether higher or lower priced. Thanks for watching. - Marc

[@bradleytalksmoney]

Good explanation, how does it compare to just owning the underlying asset

[@beaviswealth]

Hey Bradley. Obviously apples and oranges. The options overlay pretty much changes everything, including the reason you'd hold the underlying assets. - Marc

[@bradleytalksmoney]

@@beaviswealth thanks! so if the funds are in and out of stocks but gaining value from the options, does the price more follow the underlying assets or is the price movement correlated closer to the income that's being generated by the options

[@northshorehighlanders6167]

@@doubledtv9102 Apples = realized income (or whatever terminology is preferably applied). Oranges = unrealized appreciation; you don't get it until you sell. Additionally, "higher total return" is based on historical averages, not the "done deal" realized income. I'm old. I like income. Apples and oranges.

[@henryhunter5419]

I have not invested in CC ETFs, do you know if these ETF managers sell ATM CCs on their holdings or mostly OTM CCs and do they usually use 30 day expiries or shorter/longer term expiries?

[@beaviswealth]

Hi Henry. Different ETFs use different strategies, with ATM, OTM, etc. The best way to learn this is by reading the fund facts for whichever funds you're interested in, and see what the fund managers say and plan to do. Thanks for asking. - Marc

[@yannclisson8575]

Thanks for the video, There is a part I didn’t understand well. Why are you saying in your 2nd example that the dividend will increase based on the total portfolio value instead of the number of shares? Dividends are calculated regarding a single share unless you are considering that the dividends will increase based on the stock value (I think this is the reason and why you’ve made the TD stock graph but I am not sure). Can you clarify? Once again thanks for the contents and the quality of your videos.

[@beaviswealth]

Hi Yaan. Yes, that's what the example is saying, and yes, that's why I included the TD chart, to illustrate that in many cases, you can expect the dividend yield to remain proportionate to the share price over time. Not exactly the same day or quarter, but you can judge by the chart how correlated they are. Thanks for watching. - Marc

[@yannclisson8575]

Thanks for your answer and your time, very appreciated!

[@beaviswealth]

You bet, thanks again. - Marc

[@Icecold0505]

JEPI and JEPQ. I approve so far.

[@Slickpete83]

*what if there are no buyers for those options* ??

[@joe97nsx]

I don't see that being an issue. Most of these hold big blue chip stocks with a very liquid options market. My problem is that the management fees are high and these seem to typically underperform their index etf counterparts.

[@beaviswealth]

The options market is very robust, and with the large cap, liquid holdings these funds use, it's hard to imagine it being an issue. Good question. - Marc

[@Duuj1]

Since they buy and sell frequently isn't there a big capital gains tax on these etfs?

[@twfinc6855]

so when they drop like they are now lower so they in fact buy back even more shares than they had? plus the premium??

[@beaviswealth]

Hi. You mean if the share price drops? In that case, the shares wouldn't be called away, and the fund would simply continue to own them. When the options contract expire, they would write new calls. I hope that answers your question, thanks. - Marc

[@hashbrown9245]

My biggest concern with covered calls is that they don’t provide much value in reality, while the funds cost order of magnitudes more than regular indexed ETFs. The distributions are also either unreliable, or simple a return of capital. During bull markets, CC ETFs will underperform, while in sideways or bear markets, the distributions will be cut as premiums for call options decrease. These ETFs feel like just another gimmick designed to get people into more expensive investment products

[@beaviswealth]

I respect your opinion. Some of what you say might be true, some might fall into the camp of commonly misunderstanding of how these funds work. And, most importantly, not all high yield or covered call ETFs are run the same. You have to read the prospectus of each one so that you know the nuances and what you are owning. And a bear market doesn't mean the premiums for call options will decrease. That's related to volatility, not necessarily direction. - Marc

[@petekraemer2538]

Dividends are paid at a per share amount not as s percentage of holdings.

[@beaviswealth]

You're right, Pete. To illustrate the concept, I used a %, which would be expected to keep pace with the share price, proportionately. Another way of saying it would be "the DPS is expected to rise in proportion to the the share price, over the long term." The end result would be the same. Again, all conceptually, over time. Thanks for watching the video and for taking the time to comment. - Marc

[@ib516]

Thanks!

[@cirodirosa6752]

Great explanation. I prefer to apply covered call strategies on my own on blue-chip stocks. With multi leg, we can buy 100 shares and write an ITM option to get a safe return. JNJ @$97 for 100 shares with interest / premium yields 9% on a 1 year contract. ITM contracts usually don't get called away... Before the year is up. I will roll over to a higher strike / premium to eventually own the shares outright.

[@beaviswealth]

Thanks for sharing your strategy. Sounds like you've got a good grasp of the way things work. - Marc

[@jamegrabham9992]

Great job…thank you

[@beaviswealth]

Thank you. And thanks for watching. - Marc

[@hashbrown9245]

The math at 5:10 is simply wrong, if the share price doubles, the dividend yield will be slashed in half. This means that he only gets $2.5 in yearly dividends

[@dominicpaquette5516]

Totally agree on this. You need to keep the dividend amount per share, not the percentage.

[@beaviswealth]

Not sure whether you continued through the video, but I did state, on a number of occasions, that the first scenario was for the purpose of showing the math only. It said it wasn't a realistic scenario. Further in the video, it does speak to an actual track record of dividends keeping pace, proportionately , with share prices. Hope you find the time to tune in for the balance of the video. - Marc

[@James_48]

@@beaviswealth but most stocks only raise dividends annually, and some less frequently. Yes, the banks often do it 2x year but not always. If the CC ETFs are selling 30 day calls there can be really long intervals before the yield catches up to the share price. Maybe I missed it but I don’t think this was reflected in the second example.

[@beaviswealth]

Hi James. You are correct. Sadly, in a video of this type I couldn't cover all potential scenarios, but if my hope is that if an investor understands the foundational concept of the math, they can then apply it to their own situation. I don't see the scenario where an investor (or certainly an ETF) would embark on this strategy for only on month, and in fact it would pretty much only be successful if applied for a multi-year period. The math in the video should prove reliable over this more normal time frame. Thanks for adding to the discussion, James, as you always do. 👍 - Marc

[@hans5307]

That's exactly what I thought. If the dividend is $ 2.50 on a share price of $ 50 why is the dividend yield on 1 share at $ 100 still at 5 %. The dividend per share is still $ 2.50. Therefore the yield is 2.5% on a share price of $ 100.

[@juanperez-gh8bl]

Ey Marc! thank you for very clear information, ETFs are a good way to get very sure returns in my opinion. "Ey Marc! gracias por la informacion muy clara, los ETFs son una buena forma de conseguir rentabilidades muy seguras en mi opinion."

[@beaviswealth]

Thanks, Juan. Cheers. - Marc

[@zampej963]

Who ever had or has you as an wealth manager should be counting their lucky stars ! merci

[@CanadianDividendInvesting]

Thanks for the clarification, awesome video!!

[@beaviswealth]

Any time! - Marc

[@noellebischoff224]

Thank you for the explanation.

[@beaviswealth]

You are welcome, Noelle. thanks. - Marc

[@frugalguy]

First, great video & good examples to illustrate how the funds work :). @1:43 you ask/answer the question of whether the fund loses the dividend on the shares if the call options sold are exercised before the ex-dividend date and your answer is "no". That's not correct. You do in fact lose the dividend on the shares if the holder of the call options exercises them before the ex-dividend date. I understand that the premium received from selling the options helps to offset that loss, but the dividend is lost....unless I'm missing something....

[@beaviswealth]

What's missing in your explanation is that the fund will rebuy the shares the same day they are called away, if they are. Essentially, they hold the shares every day. - Marc

[@deanbryson8387]

Wow Marc , thanks for the special video to explain the math and mechanics for these covered call investments ! Aha!

[@beaviswealth]

My pleasure, Dean. Thanks for watching. - Marc

[@derekcox6531]

There’s SO much misinformation and misunderstanding about covered call ETFs out in the public domain. KZbin itself is saturated with “experts” who don’t themselves understand covered call overlay,but keep right on perpetuating the ignorance. Not helpful! You nailed it down with a couple taps Marc,andTHAT is helpful.

[@beaviswealth]

Thanks, Derek. I'm stunned so many people don't get the concept of a concept. Oh well, I try. - Marc

[@marvinpham5180]

First lol

[@beaviswealth]

😂😂