RBC U.S. Dividend Covered Call ETF (RUDC): A High-Yield Income Play in a Rising Rate Landscape

The RBC U.S. Dividend Covered Call ETF (RUDC) has declared a CAD 0.115 monthly dividend, underscoring its position as a compelling income-generating vehicle in an era of rising interest rates. With its unique covered call strategy and a distribution yield of 6.12%, RUDC offers investors a blend of stability and enhanced returns, particularly as central banks normalize rates post-pandemic. Here's why this ETF deserves attention—and how to capitalize on its income potential.

The Covered Call Edge: Premium Income in Volatile Markets

RUDC's core strategy involves holding a portfolio of U.S. dividend-paying stocks while selling at-the-money (ATM) call options on its holdings. This generates premium income, which is reinvested or distributed to investors. In a rising rate environment, this dual-income approach—dividends from equities plus option premiums—creates a buffer against bond market volatility.

Unlike traditional dividend ETFs, RUDC's covered call mechanism caps upside potential during strong bull markets. However, this trade-off proves advantageous in sideways or choppy markets, where the premiums offset minor price declines. For example, during the 2022 bear market, covered call ETFs like RUDC outperformed long-only equity funds by 3–5% on average, as outlined in recent performance data.

Stability Anchored in U.S. Dividend Stocks

The ETF's underlying portfolio comprises U.S. equities with strong dividend histories, typically from sectors like utilities, consumer staples, and healthcare—industries less sensitive to economic cycles. These stocks form a stable foundation, ensuring consistent cash flows even as rates rise.

The consistency of RUDC's distributions is further bolstered by its monthly payout structure, which smooths volatility compared to quarterly dividends. Since its inception, RUDC has maintained uninterrupted distributions, a rarity in volatile markets.

Tax Considerations: A Nuanced Advantage

While RUDC's distributions are primarily taxed as ordinary income in Canada due to its use of structured products, a portion may qualify as return of capital (ROC), reducing taxable income in the short term. For taxable accounts, this creates a temporary tax shield, though ROC erodes the investor's cost basis over time.

Investors in tax-advantaged accounts (e.g., RRSPs or TFSAs) can fully capture the 6.12% yield without immediate tax consequences. However, U.S. withholding taxes (15%) apply to dividends from foreign equities, so consulting a tax advisor is prudent.

Positioning in a Rising Rate Environment

As central banks tighten monetary policy, bond yields are climbing, but traditional fixed-income instruments face prolonged headwinds. RUDC's high yield and income resilience make it a high-conviction alternative to low-yielding bonds.

The ETF's focus on U.S. dividend stocks also mitigates currency risk for Canadian investors, as it's listed in CAD and hedged against USD fluctuations. This contrasts with unhedged equity ETFs, which could suffer in a strong CAD environment.

Risks and Trade-Offs to Consider

• NAV Erosion: Over time, RUDC's net asset value (NAV) may lag its underlying index due to the capped upside from call options. For example, a pure S&P 500 ETF could outperform during a strong rally.
• Rate Sensitivity: While RUDC benefits from higher rates boosting option premiums, a prolonged recession could pressure dividend payouts from its holdings.
• Liquidity: RUDC's average daily trading volume is CAD 2.5 million, sufficient for most retail investors but less than mega-ETFs like VUN or XIU.

Investment Thesis: Act Before Yields Compress

With the Bank of Canada and the Federal Reserve signaling further rate hikes, now is the time to lock in RUDC's 6.12% yield. The ETF's covered call strategy and diversified dividend portfolio offer a high-yield, low-volatility alternative to bonds, ideal for retirees or income-focused portfolios.

Final Call to Action

RUDC is not a growth engine for aggressive investors but a defensive income play in a rising rate world. Pair it with high-quality bonds or dividend ETFs like JEPQ for balanced exposure. For taxable accounts, prioritize tax-advantaged wrappers to maximize after-tax returns.

As rates normalize, RUDC's blend of U.S. dividends and option premiums positions it to thrive—just make sure to act before competing yields compress its appeal.

Disclaimer: Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.