XEQT vs Covered Call ETFs: Why Chasing Yield Could Cost You Thousands

Last summer, a friend of mine texted me a screenshot of his brokerage account. He was earning over $800 a month in dividend income from a handful of covered call ETFs. “Bro, look at this yield,” he wrote. “Over 12%. Why would anyone buy anything else?”

I stared at that screenshot for a long time. I will not lie – part of me felt a pang of jealousy. My XEQT portfolio does not spit out $800 a month in cash. It quietly compounds in the background, doing its boring thing while his account looked like an ATM machine.

So I did what any reasonable person would do. I opened a spreadsheet, pulled up the actual total return numbers, and compared his covered call strategy to my XEQT approach over multiple time periods. What I found was not even close. His “12% yield” was hiding a painful truth: the covered call ETFs were eating his capital alive, and over time, my boring XEQT portfolio was building significantly more wealth.

If you have been tempted by the siren song of 10%+ yields from covered call ETFs like QQCC, HMAX, ENCC, or ZWB, this post is for you. I am going to explain exactly how these products work, why they cap your upside, when they actually make sense, and why XEQT’s total return approach builds more wealth for the vast majority of Canadian investors.

1. What Are Covered Call ETFs and How Do They Work?

Before I rip into these products, let me be fair and explain what they actually do. Because the strategy itself is not inherently evil – it is just widely misunderstood and marketed in a way that preys on income-hungry investors.

A covered call strategy works like this:

1. The ETF buys a basket of stocks (say, the top holdings in the S&P/TSX 60 or the Nasdaq 100).
2. The ETF then sells call options on those stocks. A call option gives someone else the right to buy the stock at a specific price (the “strike price”) within a certain time frame.
3. In exchange for selling those options, the ETF collects a premium – essentially cash upfront.
4. That premium is what gets distributed to you as the big, juicy “dividend.”

Sounds great, right? Free money from selling options? Here is the catch:

• If the stock price rises above the strike price, the ETF is forced to sell the stock at the lower strike price. You miss out on the upside. This is called “capping your gains.”
• If the stock price drops, you still own it and absorb the full loss. The small option premium you collected does not come close to offsetting a significant decline.
• In flat or slightly down markets, covered calls actually work reasonably well. The premium income provides a small cushion.

So the trade-off is simple: you give up unlimited upside in exchange for a small, predictable income stream. In bull markets (which is what the stock market does most of the time, historically), this is a terrible deal.

Think of it like renting out your car. You get a predictable $200/month in rental income, but the renter has an option to buy your car for $25,000 whenever they want. If your car appreciates to $35,000, you are forced to sell it at $25,000. You kept the $200 monthly payments but lost $10,000 in appreciation. That is covered calls in a nutshell.

2. The Covered Call ETFs Canadians Are Buying

Let me introduce the main characters. These are the covered call ETFs that dominate Canadian investing forums and YouTube thumbnails:

• QQCC (Global X NASDAQ 100 Covered Call ETF) – Writes calls on Nasdaq 100 holdings. Yield: ~10-12%.
• HMAX (Hamilton Canadian Financials Yield Maximizer ETF) – Writes calls on Canadian bank stocks. Yield: ~13-15%.
• ENCC (Global X S&P 500 Covered Call ETF) – Writes calls on S&P 500 or energy holdings. Yield: ~9-11%.
• ZWB (BMO Covered Call Canadian Banks ETF) – The OG covered call ETF. Writes calls on Canadian bank stocks. Yield: ~6-8%.

Now look at those yields. 10%, 13%, even 15%. When a GIC pays 3.5% and a savings account gives you 2%, those numbers look almost too good to be true.

That is because, in a sense, they are.

3. Head-to-Head: XEQT vs Covered Call ETFs

Let’s put the actual numbers on the table. This is the comparison that the covered call ETF marketing materials hope you never see.

The Basics

A few things jump out immediately:

• MER: XEQT charges 0.20%. The covered call ETFs charge 0.65-0.72% – roughly three times more. That fee drag compounds every single year.
• Diversification: XEQT holds over 9,000 stocks across 49 countries. HMAX holds about 25 Canadian bank stocks. ZWB holds just 6 Canadian banks. That concentration risk is staggering.
• Yield vs total return: Yes, the covered call ETFs have dramatically higher yields. But yield is not return. This is the most important distinction in this entire article.

Total Return Comparison

Here is where the rubber meets the road. Total return means price appreciation plus all distributions, reinvested.

Read those numbers carefully. Yes, the covered call ETFs generated far more income. HMAX pumped out roughly $20,000 in distributions on a $50,000 investment over three years. XEQT generated only about $4,200.

But look at the total return. XEQT’s $50,000 grew to roughly $65,800. HMAX’s $50,000 grew to roughly $61,300. That is a $4,500 gap – and it widens dramatically over longer time horizons.

The covered call ETFs paid you a lot of income, but they also eroded the underlying capital. You were getting paid with your own money. It is like a restaurant that offers free bread but charges you double for the entree.

4. Why Covered Call ETFs Destroy Long-Term Wealth

Let me explain the mechanics of why this happens. It is not complicated, but it is deeply counterintuitive for people who fixate on yield.

The Upside Cap Problem

Stock markets go up roughly 70% of the time on a yearly basis. When they go up, they often go up a lot. Think of the massive rallies in 2023, the recovery after COVID in 2020, or the tech surge in 2024.

Covered call ETFs miss most of these rallies because they have sold away the upside. When the Nasdaq jumps 30% in a year, QQCC might capture only 10-15% of that move while collecting its option premium. The net result is significantly less total return than simply owning the index.

The Asymmetric Loss Problem

Here is the really painful part. Covered call ETFs:

• Cap your upside in bull markets (which happen most of the time)
• Give you full downside exposure in bear markets (the option premium provides only a tiny cushion)

This is the worst of both worlds. You participate fully in crashes but only partially in recoveries. Over time, this asymmetry devastates your compounding.

The Return of Capital Problem

Many covered call ETFs distribute more in “dividends” than they actually earn. When this happens, part of your distribution is classified as return of capital (ROC). This sounds technical, but it means the ETF is literally paying you back your own invested money and calling it “income.”

Return of capital:

• Reduces your adjusted cost base, meaning you will owe more capital gains tax when you eventually sell
• Erodes the NAV (net asset value) of the ETF over time
• Creates the illusion of income when in reality your investment is shrinking
• Makes the yield look sustainable when it may not be

Check the annual reports of any high-yielding covered call ETF. You will almost always find a significant ROC component. That 13% yield from HMAX? A meaningful chunk of it is your own money coming back to you.

The Fee Drag Problem

At 0.65-0.72% MER, covered call ETFs charge roughly three times what XEQT charges. On a $100,000 portfolio:

• XEQT fees: ~$200/year
• Covered call ETF fees: ~$650-720/year

That is $450-520 more per year going to the fund manager instead of your portfolio. Over 20 years, compounded, that fee difference alone costs you $12,000-15,000 on a $100,000 investment.

5. The “Yield Illusion” – Why Our Brains Trick Us

I do not blame anyone for being attracted to covered call ETFs. The marketing is brilliant, and our brains are wired to fall for it.

Here is why the yield illusion is so powerful:

• Monthly deposits feel productive. Seeing $800 land in your account every month feels like progress. Meanwhile, XEQT’s growth is invisible until you check your total balance.
• Yield is easy to understand. “I invest $100,000, I get $12,000 a year” is simple math. Total return requires understanding compounding, reinvestment, and capital appreciation – concepts that are less intuitive.
• Social media amplifies it. Every Canadian finance YouTuber with a covered call portfolio is posting monthly income updates. Nobody makes viral content about “my index fund quietly appreciated by 0.8% this month.”
• Loss aversion. People hate selling shares for income. Dividends feel like you are keeping your shares intact. But mathematically, selling $1,000 of XEQT shares is identical to receiving $1,000 in dividends (actually slightly better, because you control the timing and tax implications).

The truth is that total return is total return. Whether it comes as dividends, capital gains, or some combination does not matter. What matters is the total number at the bottom of your statement after 10, 20, or 30 years. And on that metric, XEQT wins convincingly.

6. When Covered Call ETFs Actually Make Sense

I promised I would be fair, so let me give covered call ETFs their due. There are scenarios where they are not a terrible choice:

• You are retired and need monthly income right now. If you are 65+ and drawing down your portfolio, a covered call ETF can simplify cash flow management. You get predictable monthly income without having to sell shares. The upside cap matters less when your time horizon is shorter.
• You are in a flat or sideways market for an extended period. If the market goes nowhere for years, covered calls outperform because the option premium is pure profit. The problem is that you cannot predict when this will happen.
• You have a very specific short-term income need. Maybe you need $1,000/month from your portfolio for the next 2-3 years while bridging to a pension. A covered call ETF can serve as a predictable income tool for a defined period.
• You are in a non-registered account and need tax-efficient distributions. Some covered call ETFs distribute a high proportion of return of capital, which is tax-deferred. For very specific tax situations, this can be advantageous (though you should talk to an accountant, not a blog).

Notice what all of these scenarios have in common: they involve short time horizons, specific income needs, or retirement drawdown. If you are 25, 35, or even 45 years old and accumulating wealth for the future, covered call ETFs are almost certainly the wrong tool.

7. XEQT: The Boring Strategy That Wins

So what makes XEQT the better choice for most Canadians? Let me count the ways:

Total Market Exposure

XEQT holds over 9,000 stocks across 49 countries through four underlying iShares index funds. You own:

• US giants like Apple, Microsoft, Nvidia, and Amazon
• Canadian banks, energy companies, and resource firms
• European blue chips like Nestle, ASML, and Novo Nordisk
• Emerging market growth stories in India, Taiwan, and Brazil

When any sector, country, or company has its moment in the sun, you are there. No upside cap. No option premium siphoning away your gains.

Rock-Bottom Fees

At a 0.20% MER, XEQT is one of the cheapest all-in-one ETFs in Canada. Every dollar that does not go to fees stays in your portfolio and compounds for you. Over a 30-year investment horizon, the fee savings versus a 0.65% covered call ETF amount to tens of thousands of dollars.

Automatic Rebalancing

XEQT automatically rebalances across its four underlying funds, maintaining your target allocation without you lifting a finger. No need to monitor option expiry dates, strike prices, or premium income. Buy it, hold it, add to it. Done.

Full Participation in Bull Markets

This is the big one. When the market rips higher – and it does this more often than not – XEQT captures every penny of that upside. No options contracts limiting your gains. No fund manager deciding how much upside to sell away. Just pure, unfiltered market returns.

Simplicity

One ticker. One purchase. Global diversification, automatic rebalancing, rock-bottom fees, and full market participation. You can set up automatic weekly purchases on Wealthsimple and literally never think about your investments again. Your time and mental energy can go toward your career, your family, or your hobbies – the things that actually make you wealthy and happy.

8. The 20-Year Projection: XEQT vs Covered Call ETFs

Let me paint the picture that really drove the point home for me. Assume you invest $50,000 today and add $500/month for 20 years.

Yes, the covered call ETF paid you roughly $112,000 in distributions over 20 years versus $38,000 from XEQT. That feels amazing in the moment. Monthly cash deposits, income screenshots, the works.

But your total wealth with XEQT is $452,000 versus $310,000. That is a $142,000 difference. You could buy a condo down payment with that gap. You could retire two years earlier. You could fund your kids’ education.

The covered call investor got more income along the way but ended up with $142,000 less wealth. That is the cost of chasing yield.

9. What About My Friend?

Remember my friend from the beginning of this post? The one with the $800/month dividend screenshots?

I eventually sat down with him and walked through the numbers. We compared his covered call portfolio’s total return (price change plus dividends) to a hypothetical XEQT portfolio with the same starting amount.

He was genuinely shocked. He had been so focused on the monthly income that he had never once checked his total portfolio value. When he did, he realized his initial investment had actually shrunk in value. The distributions had masked the fact that his capital was eroding.

He has not completely abandoned covered call ETFs – he still holds a small position for psychological comfort – but the bulk of his new contributions now go to XEQT. He told me recently: “I wish I had understood the difference between yield and total return three years ago.”

That is exactly why I wrote this post.

10. The Bottom Line

Here is my honest take after years of investing and obsessing over this exact question:

Covered call ETFs are not scams. They are legitimate financial products that serve a real purpose for a specific group of investors – primarily retirees who need predictable monthly income and have short time horizons.

But for the vast majority of Canadian investors under 55 who are building wealth, covered call ETFs are a suboptimal choice. They:

• Cap your upside in bull markets
• Charge higher fees
• Often distribute return of capital disguised as income
• Concentrate your portfolio in narrow sectors
• Underperform total-market index funds over long periods

XEQT gives you the full picture. Global diversification across 9,000+ stocks. Rock-bottom fees at 0.20%. Full participation in market growth. Automatic rebalancing. And a total return that, historically, beats covered call strategies by a wide margin over any meaningful time horizon.

Stop looking at monthly income screenshots and start looking at total portfolio value. That is the number that determines when you can retire, how much you can leave to your kids, and whether your money actually worked as hard as it could have.

The boring strategy wins. It almost always does.

Disclaimer: This post is for informational purposes only and does not constitute financial advice. I am not a financial advisor. XEQT and the covered call ETFs mentioned are real financial products; do your own research before investing. Returns mentioned are approximate and based on historical data, which does not guarantee future results. I may earn a referral bonus if you sign up for Wealthsimple using the links in this post.