Covered-call strategies require clear client conversations

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Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

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Robert Bechard, executive director, exchange traded funds, CIBC Asset Management 

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2026 marks 15 years since the launch of Canada’s first covered-call ETF, a milestone I’m proud to have been part of. 

When this product first launched, it was relatively straightforward, passively managed, focused on a subset of large-cap Canadian equities, and designed to generate extra yield through systematic call writing. For advisors, it offered a simple, one-ticket solution that replaced the need for manual call writing, providing clients with higher yield, tax efficiency and some downside protection. 

Since then, the landscape has evolved significantly. 

We’ve seen the introduction of sector-specific, international, thematic and single-security covered-call ETFs, as well as some complex strategies involving leverage and the use of both calls and put options. 

Transparency and education have also improved, with advisors now benefiting from detailed reporting, robust communication from the ETF providers. Ultimately, these developments have empowered advisors to offer more sophisticated, customized solutions that address a broader range of their client needs. 

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For advisors, understanding when covered-call strategies are most effective is crucial for client outcomes. Covered-call ETFs tend to perform best in sideways or moderately bullish markets, where equity prices are stable or rising gradually. In these environments, the premiums collected from selling calls can provide a steady income stream. 

From a client suitability perspective, covered-call ETFs are particularly attractive for income-oriented investors, retirees, those in drawdown, or clients seeking to supplement fixed-income allocations. They can also be useful for clients who are risk averse, but still want some equity exposure, as the option premiums provide a cushion against minor market declines. 

However, it’s important to communicate the trade-offs. Covered-call strategies cap some upside potential. So in strong bull markets, clients may underperform traditional equities. Advisors should understand the percentage of the portfolio covered and how close to the money the options are written, as this varies between products and ETF providers. 

When recommending covered-call ETFs, advisors should assess the client’s objectives, risk tolerance and income needs. These strategies work best as part of a diversified portfolio, not as a replacement for core equity holdings. Setting clear expectations and providing ongoing education are key to helping clients understand both the benefits and limitations of these strategies. 

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The shift towards active management has been one of the most significant changes in [the] covered-call ETF space, as it has allowed the combination of active stock picking with an active option overlay. While yield remains an important factor, the quality of security selection should become the priority consideration when constructing the underlying portfolio. 

Active portfolio management empowers managers to carefully select securities based on fundamentals and market outlook, enabling them to adapt to changing conditions and capitalize on emerging opportunities. 

The same fundamental views used to pick the underlying portfolio can be used to help select which stocks to write options on, and at what strike. 

For example, combining a traditional, high-quality dividend-paying portfolio managed by a fundamental portfolio manager and research team with an experienced option overlay team, who incorporates the fundamental team’s views into their overlay process, can be a very powerful combination. Active management allows portfolio managers to adapt to changing market conditions, select securities based on fundamentals, and optimize option strategies for yield enhancement and maximize upside capture. 

When it comes to any covered-call ETFs, I highly recommend conducting a proper due diligence on the ETF and manager. Advisors should evaluate the manager’s expertise in both security selection and option trading, as well as their approach to strike-price selection and overall risk controls. Understand their experience and tenure managing covered calls and active equity strategies. Meet with the portfolio managers. Understand their investment process and how they seek to add value. 

Managing an option overlay is a very specialized skill set, so it is important to understand the level of experience the manager has, and whether it’s through different market cycles and events. It is important to understand how the managers adapt to market changes, especially during periods of volatility. Transparency and accessibility is crucial. Look for ETF providers who offer clear reporting and encourage access to their portfolio managers and investment teams. 

Fees are another key consideration. Active management typically comes with higher costs. So weigh this against the potential for enhanced returns. Also consider liquidity, trading volume and bid/ask spread to ensure efficient execution. Think about how the ETF fits within the client’s overall portfolio, whether a core income generator, tactical asset allocation, or diversifier. The goal is to align the ETF strategy and risk profile with your client’s long-term objectives. 

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When introducing covered-call strategies to clients, especially those who are new to options, focus on making the concept as accessible and relatable as possible. Start by explaining the basics in simple terms. A covered call involves owning shares of a stock and then selling a call option on those same shares. You can use an analogy, like comparing it to renting out your house. You’re earning extra income from something that you already own, but you’re also agreeing that if the renter wants to buy it at a price, you’ll sell it. 

Walk clients through the process step by step. First, you own the stock. Next, you sell a call option, which gives someone else the right to buy your shares at a specific price at a certain date. In return, you receive a premium, which is essentially extra income. 

Make sure you outline the possible outcomes. If the stock stays below the strike price, you keep both the shares and the premium. If it rises above the strike price, you may have to sell the shares at that price, but you will still keep the premium. Highlight the main benefits, such as generating additional income and providing a bit of downside protection through the premium received. 

At the same time, be transparent about the trade-offs, like the fact that your upside is capped if the stock price rises significantly, and that that strategy doesn’t protect against large losses if the stock falls sharply. It is also helpful to emphasize [that] with covered-call ETFs, the process is managed by experienced professionals, allowing investors to benefit from option strategies without needing to navigate the complexities of options trading themselves. 

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Covered-call ETFs have emerged as a powerful and versatile tool for Canadian advisors, enabling them to deliver enhanced income, manage risk, and offer differentiated solutions to clients in a variety of market environments. 

As these products continue to evolve, incorporating new asset classes, active management, innovative strategies, advisors who stay informed and conduct thorough due diligence will be best positioned to capitalize on their full potential. 

By understanding the nuances of covered-call strategies and aligning them with their clients’ unique objectives, risk tolerances and income needs, advisors can add significant value to client portfolios. 

The ability to generate consistent cash flow, provide a measure of downside protection, and tailor solutions make covered-call ETFs a compelling addition to the modern advisor’s toolkit. Ultimately, embracing these strategies with a focus on education, transparency and ongoing communication will help advisors build stronger, more trusted client relationships, and deliver superior long-term outcomes in an ever-changing investment landscape.

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