Covered Call ETFs at Mackenzie Investments

In June 2023, Prerna Mathews, vice president of Exchange-Traded Fund (ETF) Product Strategy at Mackenzie Investments (Mackenzie), was considering what ETFs to launch for the remainder of the year. As Mathews deliberated over the potential launch of a covered call ETF at Mackenzie, she had many things to consider. How would this product compare to existing investment solutions offered by Mackenzie? What should the underlying portfolio that the calls were written on be, and what percentage of the portfolio should be covered? What should be the expiration date and strike price on the written calls? Mathews knew that these critical product decisions would have significant consequences on how such an ETF would perform under various market conditions, as well as the costs Mackenzie would incur in managing the ETF.

This case can be used in Derivatives or Portfolio Management courses, at both the undergraduate and graduate levels, as a culminating case that synthesizes learnings on options payoffs and pricing, investment strategy, and portfolio construction. After working through the case and assignment questions, students will be able to<br><br><ul><li>Understand a real-world application of derivatives, specifically covered call strategies in ETFs, and how options can be used in an investment portfolio to alter the risk/return profile.</li><li>Understand the inherent trade-off between higher yield (additional income) and reduced upside participation that is present in any covered call strategy.</li><li>Understand the various relevant product design dimensions in executing an options strategy on a portfolio of securities, and understand the associated implications each decision has on the risk/return profile of the fund.</li><li>Apply knowledge on options payoffs and options pricing to estimate the potential distribution yield of a covered call ETF and draw payoff and profit and loss (P&L) diagrams for covered call ETFs, ranging in several design parameters.</li><li>Apply understanding of the various performance-related trade-offs to design a covered call strategy in an ETF that achieves the desired investment objectives by subordinating design decisions to investment goals.</li><li>Identify under which market conditions a covered call strategy would generate outperformance, and apply this understanding to select appropriate ETFs for investors with different market outlooks.</li></ul>

• Exchange Traded Funds, Covered Calls