Global X Equal Weight Canadian Bank Covered Call ETF: A Steady Income Play Amid Volatility

The Global X Equal Weight Canadian Bank Covered Call ETF (BKCL.TO) has declared a CAD 0.145 dividend per share, marking another consistent payout for investors in an environment where traditional fixed-income instruments struggle to keep pace with inflation. This distribution underscores the ETF’s design to blend equity exposure with income generation through a covered call strategy—a mechanism that has gained traction among income-focused investors seeking stability.

The Mechanics of the Covered Call Strategy

The ETF employs a dual approach: it holds an equal-weight portfolio of Canadian banks listed in the Solactive Equal Weight Canada Banks Index and sells call options on its holdings. This covered call strategy generates premium income, which contributes to the monthly distributions. By equally weighting its holdings—unlike market-cap-weighted peers—it reduces reliance on the largest banks, potentially mitigating concentration risk.

However, this strategy comes with trade-offs. Selling call options caps the ETF’s upside potential if the banks’ shares surge. Still, in a low-growth or sideways market, the steady premiums can provide predictable income.

Performance and Dividend History

The CAD 0.145 dividend aligns with the ETF’s consistent payout pattern. Over the past year, distributions averaged CAD 0.142 per month, translating to an annualized yield of approximately 6.5% based on the current NAV of CAD $28.80. This compares favorably to the broader Canadian bank sector, where dividend yields for individual stocks like Royal Bank (RY.TO) or Toronto-Dominion (TD.TO) are closer to 4-5%.

The ETF’s total return, however, depends on both equity performance and the covered call income. Over the past year, BKCL.TO has returned around 8%, outperforming the S&P/TSX Composite Index by roughly 3 percentage points, though lagging the Solactive index by about 1% due to the capped upside.

Why Canadian Banks?

Canadian banks have long been a haven for conservative investors, backed by robust capital ratios and stable earnings. The sector’s resilience through the pandemic and geopolitical turbulence has bolstered confidence. Key banks like Bank of Montreal (BMO.TO) and Scotiabank (BNS.TO) have maintained dividend payouts, even as global peers cut distributions.

Risks and Considerations

While the covered call strategy offers income predictability, it introduces sensitivity to interest rates and market volatility. Rising rates could pressure bank stocks if loan demand slows, while a sharp market rebound might leave the ETF’s capped upside as a liability. Additionally, the equal-weight approach may underperform if smaller banks underdeliver relative to larger peers.

Conclusion: A Niche Income Play with Caution

The Global X Equal Weight Canadian Bank Covered Call ETF remains a compelling option for investors prioritizing steady income and diversification within the Canadian financial sector. Its 6.5% annualized yield, bolstered by the covered call strategy, provides a tangible advantage over traditional bonds. However, investors must weigh this against potential downside constraints and sector-specific risks.

As of Q3 2023, BKCL.TO’s yield outperforms the iShares Canadian Financials ETF (XFN.TO), which yields around 4.2%, though XFN.TO has a slightly higher one-year return. For income seekers willing to accept moderate volatility and capped upside potential, BKCL.TO offers a structured way to capitalize on Canadian banks’ stability while enhancing cash flow. But as always, diversification and a long-term horizon are critical in navigating the trade-offs inherent in covered call strategies.