The Average Investor's Blog

A software developer view on the markets

Covered Call ETF Performance

Posted by The Average Investor on Nov 1, 2011

Covered call ETFs have become quite popular lately. Living in Canada, I have been holding a couple Canadian members of this family for the last few months. When I purchased them, I liked the benefits and since I wasn’t expecting any bull markets on the horizon, I bought some. These were new products back them, so I promised myself to do some more detailed analysis at a later point.

Today was that later point. I took Horizons HXT and HEX ETFs. There are more details on the web site, but in general, HXT is a TSX60 ETF with re-invested dividends, while HEX is the covered called version, paying dividends on monthly basis. HEX was introduced in April and I made my purchase a few months later. Before jumping to the results let’s try to state my expectations. I was expecting after dividends HEX to outperform HXT. Seriously, weren’t the last few months the “best” by definition environment for covered call ETFs?

Now, here is the performance chart:



This chart was created using the following code:

library( quantmod )
library( ggplot2 )

# Get the symbols
getSymbols( c("HXT.TO", "HEX.TO"), from="1900-01-01")

# Align the dates
mm = merge( Ad( HXT.TO ), Ad( HEX.TO ), all=F )

# Compute the returns
hxtRets = dailyReturn( mm[,1] )
hexRets = dailyReturn( mm[,2] )

# Compute the growth
hxtGrowth = cumprod( 1 + hxtRets )
hexGrowth = cumprod( 1 + hexRets )

# Build a data frame for ggplot
df = data.frame(
            row.names=seq(1, length(time(hxtGrowth))))
colnames(df) = c("Date", "HXT", "HEX")

# Plot
gg = ggplot( df, aes( Date ) )
gg = gg + geom_line( aes( y=HXT, color="HXT" ) )
gg = gg + geom_line( aes( y=HEX, color="HEX" ) )
gg = gg + opts( title="HXT vs HEX" )
gg = gg + xlab( "Date" ) + ylab( "Growth" )
gg = gg + scale_color_manual( name="ETFs", values=c("HXT"="blue", "HEX"="red"))

Let’s put it this way – I am disappointed by this chart. Not only the covered call ETF performed worse, it did so with the same level of volatility (just eyeballing the chart). There is even more to it – the above chart assumes perfect dividend re-investment. While there is DRIP in Canada, there are no fractional shares. It’s probably insignificant, but certainly something to keep in mind for products that yield 10-20% annually. Last but not least, HXT does not pay any dividends – they are reinvested and as of recently, its trading is free if your stock broker is Scotia iTrade.

The above chart is not the only tool I used for this analysis, I also maintain a spreadsheet to track the exact performance of these ETFs. Unfortunately, the results of my spreadsheet looks similar to my chart.

The moral of the story – if something looks too good be true, probably it is. The media hype is always a suspect, even from reliable sources like the venerable BNN.


4 Responses to “Covered Call ETF Performance”

  1. burt said

    I wouldn’t be too surprised about these results. The data only go back to 2nd quarter of 2011. This has been a time of sharp moves and of increasing implied vol – both bad for covered call writing. If you go to the CME website, they have a USA simulation going back to 1987 (pre crash). It turns out that covered put writing is the best, probably because of the vol skew. If you can’t find the data, email me. I have it somewhere.

    Why did you use ggplot instead of plot?

  2. I can’t seem to be able to find the above link – if you can point me to it, or send me the data – that would be great.

    My expectation was that covered call ETFs would outperform (certainly not underperform) in a bear market. These are usually surrounded by volatility, so in retrospect, I was wrong. If they cannot outperform in a bull market, and if they cannot outperform in a bear market, and if they cannot outperform in any high volatility environment – what are they useful for? A +-2% sideways grind? If that’s the case – I made the right move. 🙂

  3. burt said

  4. martin bauer said


    thanks for highlighting the problem you are facing, but I reckon you are using the wrong product here. Covered call is only for sideways market, as you are synthetically short a put.
    Surely the premium you generate will reduce the loss on the downside but just a fraction of a big down move. During bear market rallies you suffer too, because you are not participating on the upside as you are capped from the 5% or 10% OTM call. Happy to explain further details

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