Covered Call ETF Glossary

A

Assets Under Management AUM

The total market value of all the assets a fund holds on behalf of its investors. Larger AUM often means tighter trading spreads and better liquidity, but size alone tells you nothing about a fund's strategy or quality.

At-the-Money ATM

Describes an option whose strike price is roughly equal to the current price of the underlying. A fund that writes at-the-money calls collects large premiums but caps almost all of its upside. See moneyness.

B

Buy-Write

The combined action of buying a security (or basket) and simultaneously writing — selling — a call option against it. It's the core trade a covered call ETF automates, which is why "buy-write" and "covered call" are often used interchangeably.

C

Call Option

A contract giving its buyer the right, but not the obligation, to buy an asset at a set strike price before a set expiry date. A covered call ETF earns income by selling call options to other investors. The opposite contract, giving the right to sell, is a put option.

Capital Gain / Capital Loss

The profit (gain) or shortfall (loss) from selling an investment for more or less than you paid. Capital gains are separate from distributions — a fund can pay high distributions while its unit price, and therefore your capital gain, moves independently.

Covered Call

A conservative options strategy: you own an asset and sell a call option against it, collecting a premium. It's "covered" because you already hold the shares you might have to deliver, which limits the risk. See the full guide.

Covered Call ETF

An exchange-traded fund that holds a portfolio of securities and systematically sells call options against them, passing the option premiums (plus any dividends) to investors as regular distributions. It packages the covered call strategy into a single tradable fund. Browse current funds in the directory.

Coverage Ratio

The portion of a fund's portfolio on which it writes call options — sometimes called the overwriting level. Higher coverage means more premium income and a tighter upside cap; lower coverage keeps more growth potential.

D

Distribution

A payment a fund makes to its unitholders, usually in cash. For covered call ETFs, distributions combine option premiums, dividends from the underlying holdings, and sometimes return of capital. People often call these payments dividends, but that isn't quite right. A dividend comes only from a company's profits, while a distribution is whatever mix of income, gains and capital the fund passes along, and each part is taxed in its own way. That's why your tax slip breaks a distribution into its pieces.

Distribution Frequency

How often a fund pays distributions. Most covered call ETFs pay monthly, though some are now moving to semi-monthly. Frequency doesn't change the total amount paid over a year; a monthly payer and a semi-monthly payer can deliver the same annual total.

Distribution Yield

A fund's most recent distribution, annualized at its payout frequency and divided by its current unit price, shown as a percentage. It reflects the fund's current payout rate and is not a promise of future payments, which can change at any time. It also differs from a dividend yield because it includes option premiums, not just dividends.

Because the price sits on the bottom of that calculation, yield moves the opposite way to price. If the price rises while the payout stays the same, the yield falls; if the price drops, the yield climbs. So it isn't a fixed rate, it shifts every trading day, and a higher yield after a price drop doesn't mean you're being paid any more per unit.

Dividend

A share of a company's profits paid to its shareholders. Dividends from a fund's underlying holdings are one source of the cash a covered call ETF pays out, but what the fund pays you is a distribution, not a dividend. The two words get swapped all the time, yet they aren't the same thing: a dividend comes only from company profits, while a distribution can also hold option premiums, capital gains and return of capital, each taxed differently.

Dividend Yield

A company's or fund's annual dividends divided by its price. For covered call ETFs, the headline figure is usually the distribution yield, which is larger because it also includes premium income.

DRIP Dividend Reinvestment Plan

A plan that automatically uses your payouts to buy more units of the same fund instead of paying you cash. The name says dividend, but for an ETF it's really reinvesting distributions. Some companies run their own DRIPs that buy new shares at a small discount, but a broker's DRIP on an ETF is simply an automatic reinvestment, usually at no cost. Now that a lot of brokers support fractional units, the whole payout can go back into the fund rather than leaving a bit of cash behind. In a non-registered account the reinvested amount is still taxed as if you'd received it in cash.

E

ETF Exchange-Traded Fund

A pooled investment fund that trades on a stock exchange like a single share. ETFs typically follow a strategy or index and can be bought and sold throughout the trading day at market prices.

Ex-Distribution Date Ex-Date

The cut-off date that determines who receives a fund's upcoming distribution, also known as the ex-date or ex-dividend date. To be paid, you must own the fund during the market hours before its ex-distribution date; buy on or after it and the seller receives that distribution instead. On the ex-date the price usually drops by about the distribution amount, since that cash is leaving the fund.

Expiry Expiration

The date an option contract ceases to exist. Covered call ETFs typically write short-dated options and repeat the process as each batch expires — a continual cycle known as rolling — to keep generating premiums.

F

Fund of Funds

A fund that holds other funds instead of, or alongside, individual stocks. Some covered call ETFs hold a basket of their provider's own covered call ETFs, while others hold funds from other companies, sometimes adding leverage or writing extra calls on top. Its MER usually includes the costs of the funds it holds, so you aren't charged twice for the same management.

H

Hedging

Taking a position that offsets a risk you don't want. For ETFs it usually means currency hedging: a Canadian fund that owns U.S. stocks can hedge so that changes in the U.S. dollar against the Canadian dollar have little effect on your returns. Hedged funds often have "hedged" or "CAD-hedged" in their name. Compare unhedged.

I

Implied Volatility

The market's expectation of how much an asset's price will move, embedded in its option prices. Higher implied volatility means richer option premiums — which is why funds written on volatile assets can advertise higher yields, alongside higher risk.

In-the-Money ITM

Describes a call option whose strike price is below the current price of the underlying, meaning it already has intrinsic value. See moneyness.

Index

A rule-based list of securities that tracks a market or a slice of it, such as the S&P/TSX 60, the S&P 500 or the Nasdaq-100. You can't buy an index directly, but a fund can hold the same stocks. Some covered call ETFs follow an index that includes the option writing rules, while others are actively managed and choose their own holdings and calls.

L

Leverage

Using borrowed money to buy more of the holdings than the fund's own assets would allow. Most leveraged covered call ETFs in Canada borrow cash, often about 25% extra (written as 1.25x), and the leverage doesn't reset each day, so it's simply a larger position held over time. That amplifies both gains and losses, and also the income, minus the interest on the loan. Some other leveraged ETFs work differently: they use derivatives to target a multiple of a day's return, such as 2x, and reset daily, so over longer periods their results can drift away from that multiple.

Limit Order

An order to buy or sell at a price you set, or better. A buy limit won't fill above your price and a sell limit won't fill below it, so you know the worst price you'll get, though the order may not fill at all if the market doesn't reach it. Limit orders are a sensible default for ETFs, especially when the spread is wide. Compare market order.

Liquidity

How easily you can buy or sell without moving the price much. An ETF's liquidity comes mostly from the stocks it holds, not just from how many of its units trade each day, because dealers can create and redeem units to meet demand. Even so, funds that trade lightly can have wider spreads, which a limit order helps you manage.

M

Management Expense Ratio MER

The annual percentage of a fund's assets consumed by management and operating costs. Covered call ETFs usually carry higher MERs than plain index funds because active option writing costs more to run, and the fee is deducted before you receive any distributions. It includes the management fee but not trading costs, which are measured by the trading expense ratio.

Management Fee

The fee a fund company charges for running the fund, set as a yearly percentage of its assets. It's one part of the management expense ratio (MER), which also adds the fund's operating expenses and sales taxes, so the MER is usually a little higher. This directory lists the MER because it's the fuller figure. Neither number includes trading costs, which are measured by the trading expense ratio.

Market Order

An order to buy or sell right away at the best price currently available. It's quick and almost always fills, but you don't control the price, so you can pay more or receive less than you expected when the spread is wide or prices are moving fast, such as just after the market opens. Compare limit order.

Market Price

The price a fund's units actually trade at on the stock exchange, which is what you pay when you buy and receive when you sell. It moves all day with buying and selling, while the net asset value is the worth of the holdings, usually calculated once a day after the close. The two normally stay very close, but they aren't the same number, and a gap can open in fast markets or in funds that trade lightly. A fund priced above its NAV trades at a premium; below it, at a discount. Prices and returns in this directory are based on market price.

Moneyness

A description of an option's strike price relative to the current price of the underlying — in-the-money, at-the-money, or out-of-the-money. The moneyness a fund targets shapes its trade-off between income and upside.

N

Net Asset Value NAV

The per-unit value of a fund's holdings, calculated as total assets minus liabilities, divided by the number of units outstanding. It's easy to mix up with the market price, but they're two different numbers. NAV is what the holdings are worth, usually worked out once a day after the market closes, while the market price is what buyers and sellers are paying for units on the exchange. They normally sit close together, but your gains and losses come from the price you actually trade at.

O

Option Premium

The cash a call buyer pays the seller for the option. Collecting premiums is the primary way a covered call ETF generates its elevated income.

Out-of-the-Money OTM

Describes a call option whose strike price is above the current price of the underlying. Funds that write out-of-the-money calls keep more upside but collect smaller premiums. See moneyness.

P

Premium Income

The income a fund earns from selling call options, as distinct from dividends or interest. It's the ingredient that makes covered call ETF yields larger than those of ordinary dividend funds.

Price Return

The change in a fund's unit price alone, excluding distributions. Because covered call ETFs pay out so much as cash, price return understates their performance — total return is the fairer measure.

Put Option

A contract giving its buyer the right, but not the obligation, to sell an asset at a set strike price before a set expiry date. It's the mirror image of a call option, which gives the right to buy. Covered call ETFs sell calls, but a few income funds sell puts instead, collecting a premium in exchange for agreeing to buy shares if the price falls below the strike.

R

REIT Real Estate Investment Trust

A trust that owns income-producing property, such as apartments, offices, malls or warehouses, and passes most of its rental income to its unitholders as distributions. Some covered call ETFs hold REITs and write calls on them. REIT distributions often include return of capital, partly because property depreciation lowers their taxable income.

Return of Capital ROC

A tax label for part of a distribution. Rather than being taxed in the year you receive it, the ROC portion lowers your adjusted cost base (ACB), the amount you're treated as having paid for your units. The tax isn't skipped, just put off until you sell, when it shows up as a larger capital gain. In a TFSA or RRSP it makes no difference to your taxes.

Covered call funds often report a good share of ROC because of how option income, timing and past losses are treated for tax, so a high ROC figure on its own isn't a cause for concern. It's worth a closer look if a fund keeps paying out more than it earns, which can show up as a steadily falling NAV. Each provider publishes a yearly tax breakdown showing how much of a fund's payout was ROC.

Rolling

Closing an expiring option and opening a new one with a later expiry (and often a different strike). Covered call ETFs roll their options continuously to keep the premium income flowing.

S

Semi-Monthly Twice Monthly

A distribution schedule that pays twice a month, or 24 times a year. "Semi" means half, so semi-monthly means every half month, the same way semi-annual means every half year. It's easy to confuse with bi-monthly, which usually means every two months. Because the words get mixed up so easily, some funds simply say "twice monthly" or "twice per month" instead. Paying twice a month doesn't raise the yearly total; it splits it into smaller, more frequent payments.

Shareholder

Someone who owns shares of a corporation, such as a stock bought directly. Shareholders are part-owners of the company and are paid dividends out of its profits. Most Canadian ETFs, including most covered call ETFs, are set up as trusts instead, so their investors own units and are unitholders. The words are often swapped, but they describe different kinds of ownership with different tax treatment, so it's worth keeping them apart. A few ETFs are structured as corporations, and their investors are shareholders.

Split Share

A corporation that holds a portfolio of stocks and issues two classes of shares. Preferred shares receive fixed payments and get paid first, while class A shares receive the remaining income and most of the gains or losses, which works like built-in leverage. Because it's a corporation, its investors are shareholders. Payments to the preferred shares count as a cost of the class A shares, which is why their expense ratio can look high.

Spread Bid-Ask Spread

The gap between the highest price a buyer is offering (the bid) and the lowest price a seller will accept (the ask). It's a small, hidden cost each time you trade. Funds with good liquidity usually have spreads of a cent or two, while lightly traded funds can have wider ones, especially near the open and close.

Strike Price

The fixed price at which a call option's holder may buy the underlying. When a fund writes a call, the strike sets the level above which its gains on those shares are capped — see upside cap.

T

Total Return

The complete measure of performance — price change plus distributions, assuming distributions are reinvested. For income funds like covered call ETFs, total return is the number that matters most, since a price return chart alone always understates them. See it in action in the covered call ETF rankings.

Trading Expense Ratio TER

The brokerage commissions and other trading costs a fund pays when buying and selling its holdings and options, shown as a yearly percentage of its assets. It isn't included in the MER or the management fee, so adding the MER and TER gives a fuller picture of what a fund costs to own. Funds that trade options often can have a higher TER. You'll find it in a fund's annual management report.

U

Underlying

The asset — a stock, a basket of stocks, or an index — on which an option is written or that a fund holds. A covered call ETF's risk and its income both flow from its underlying holdings.

Unhedged

A fund that doesn't use currency hedging, so its returns include the effect of exchange rates. If a Canadian fund holds U.S. stocks and the U.S. dollar rises against the Canadian dollar, your returns get a boost; if it falls, they're reduced. Unhedged funds skip the cost of hedging, and some investors prefer to keep the currency exposure.

Unitholder

Someone who owns units of a fund set up as a trust, which is how most Canadian ETFs are built. A unitholder owns a slice of the whole fund rather than a piece of a company, and receives distributions rather than dividends. It's easy to say shareholder out of habit, but the difference matters. A trust passes its income through to unitholders in the form it was earned, so one distribution can be part dividends, part capital gains and part return of capital, each taxed differently.

Upside Cap

The ceiling on gains created by selling call options: above the strike price, a fund stops participating in a rally on the shares it has written calls against. The upside cap is the central trade-off of covered call investing.

V

Volatility

How much an asset's price fluctuates over time. Higher volatility raises option premiums — more income — but also signals greater risk in the underlying holdings.

Y

Yield on Cost

A distribution or dividend yield measured against the price you originally paid, rather than the current price. It shows the income return on your own cost base, and it rises if you bought before a fund's distributions grew.

Z

Zero-Day Options 0DTE

Options that expire on the same day they're written, short for zero days to expiry. Some covered call ETFs write them daily instead of monthly. Because each option lasts only hours, the fund can collect premiums many times over, and the upside cap lasts only a day before it resets.