Case

Case Solution for Covered Call ETFs at Mackenzie Investments

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Managerial Accounting

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Uploaded on July 14, 2025
Number of pages 19
Written in 2024/2025
Type Case
Professor(s) Mr karen
Grade A+

Institution Managerial Accounting
Course Managerial Accounting

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COVERED CALL ETFS AT MACKENZIE INVESTMENTS

CASE STUDY SOLUTION

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SYNOPSIS

In June 2023, Prerna Mathews, vice president of Exchange-Traded Fund (ETF) Product Strategy at
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Mackenzie Investments (Mackenzie), was considering what ETFs to launch for the remainder of the year.
A recent trend emerging in the ETF industry in Canada was covered call ETFs. These ETFs employed a
covered call writing strategy on a basket of underlying securities, trading upside participation for additional
income through options premiums. The income generated from selling call options on the underlying
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portfolio enabled these ETFs to offer flashy double-digit yields at relatively low management fees. As a
result, covered call ETFs soared in popularity among Canadian investors, gathering CA$1.6 billion 2 in
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investor flows in the first five months of 2023, prompting major ETF providers such as Mackenzie to
contemplate the addition of covered call ETFs to their existing shelf of product offerings.
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In assessing the viability of launching a covered call strategy in a Mackenzie ETF, Mathews had to consider
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The Case Solution Starts From page 7

,OBJECTIVES

• 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.
• Understand the inherent trade-off between higher yield (additional income) and reduced upside
participation that is present in any covered call strategy.
• 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.
• 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.
• 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.
• 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.

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ASSIGNMENT QUESTIONS

Assume each ETF holds 1 unit of the underlying index, so the index level is the ETF price. To calculate
ETF yield, use the following formula:

𝐴𝑛𝑛𝑢𝑎𝑙𝑖𝑧𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑓𝑟𝑜𝑚 𝑈𝑛𝑑𝑒𝑟𝑙𝑦𝑖𝑛𝑔 𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 + 𝐴𝑛𝑛𝑢𝑎𝑙𝑖𝑧𝑒𝑑 𝐶𝑎𝑙𝑙 𝑂𝑝𝑡𝑖𝑜𝑛𝑠 𝑃𝑟𝑒𝑚𝑖𝑢𝑚𝑠
𝐸𝑇𝐹 𝐷𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑌𝑖𝑒𝑙𝑑 =
𝐸𝑇𝐹 𝑃𝑟𝑖𝑐𝑒 ⬚

= 𝑈𝑛𝑑𝑒𝑟𝑙𝑦𝑖𝑛𝑔 𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑌𝑖𝑒𝑙𝑑 + 𝑂𝑝𝑡𝑖𝑜𝑛𝑠 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 𝑌𝑖𝑒𝑙𝑑

The Case Solution Starts From page 7

,1. For each of the following market scenarios, would you expect a covered call strategy to outperform or
underperform the underlying portfolio? Why?
a. Market downturn
b. Rising markets
c. Range-bound markets where returns are relatively flat
2. Which of the three proposed indices (S&P 500, Nasdaq-100, Solactive Equal Weight Canada Banks)
would you expect to generate the highest cash distribution (or “payout”) yield when paired with a
covered call strategy in an ETF? What characteristics of the underlying portfolio are relevant to its yield
potential in a covered call strategy?
3. Using the data in Case Exhibit 6, including the 180-day historical return volatility, price the at-the-money
options (K = S0) expiring in three months (T = 0.25) for each of the three indices. Calculate the resulting
distribution yield (expressed as a simple annual percentage rate [APR]) of an ETF holding a 100 per cent
covered portfolio that replicates each index. Which portfolio, when 100 per cent covered, would generate
the highest ETF yield? For which portfolio does a covered call strategy enhance yield the most?
4. Using the call price calculated in Question #3, calculate the distribution yield and draw payoff and P&L

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diagrams for an S&P 500 ETF that is 0 per cent, 50 per cent, and 100 per cent covered. What is the
relationship between the percentage of the portfolio covered and the yield/upside participation of a

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covered call ETF?
5. Using the data in Case Exhibit 7, calculate the distribution yield and draw payoff and P&L diagrams

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for a 100 per cent covered S&P 500 ETF that writes calls at the following strike prices with three
months to expiry (T = 0.25). What is the relationship between strike price and the yield/upside
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participation of a covered call ETF?
a. $4,000
b. $4,400
c. $4,800
6. Which covered call ETF should Mackenzie launch, and why? Consider the underlying index, the percentage
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of the portfolio to be covered, and the moneyness of the calls being written. Justify your product design
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decisions by explaining their implications on the ETF’s expected distribution yield and risk/return profile.
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7. Describe how each of the following changes would impact the yield of a covered call ETF:
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a. The implied volatility of the underlying portfolio decreases.
b. The risk-free rate increases by 50 basis points (bps).
c. The dividend yield of the underlying portfolio increases.
8. Consider three 100 per cent covered S&P 500 ETFs selling calls with three months to expiry (T = 0.25).
The ETFs differ only in the strike prices of the calls being sold ($4,000, $4,400, $4,800). Which ETF
would you recommend for each of the following investors given their hypotheses?
a. Brett strongly believes the S&P 500 will close at $5,000 in three months.
b. CJ believes the S&P 500 will remain relatively flat in the next three months, but is worried about
the possibility of it slipping to $4,000.
c. Jenny is convinced the S&P 500 will remain flat or slightly appreciate over the next three months,
but by no more than $100.

The Case Solution Starts From page 7

,ANALYSIS

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1. For each of the following market scenarios, would you expect a covered call strategy to
outperform or underperform the underlying portfolio? Why?

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a. Market downturn
b. Rising markets

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c. Range-bound markets where returns are relatively flat
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A covered call strategy generates premiums (additional income) in exchange
for forfeiting the right to upside capture past the strike price. This has the following implications on performance:

a. In a market downturn, the calls would not be exercised—the underlying portfolio would decline by the
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same amount as a non-covered version, but the premiums received from selling the calls would partially
offset some of the losses. Hence, in a market downturn, a covered call strategy outperforms.
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b. In rising markets, where securities appreciate beyond the strike price on the calls being sold, the calls
would be exercised and the securities would be sold at the strike price, below their market value. The
fund would not realize the full upside of the underlying portfolio, meaning a covered call strategy would
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typically underperform in rising markets due to the upside given away.
c. In a range-bound market, whether slightly positive or negative, the underlying portfolio would perform
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The Case Solution Starts From page 7

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8. Consider three 100 per cent covered S&P 500 ETFs selling calls with three months to expiry (T
= 0.25). The ETFs differ only in the strike prices of the calls being sold ($4,000, $4,400, $4,800).
Which ETF would you recommend for each of the following investors given their hypotheses?
a. Brett strongly believes the S&P 500 will close at $5,000 in three months.
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b. CJ believes the S&P 500 will remain relatively flat in the next three months, but is worried
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about the possibility of it slipping to $4,000.
c. Jenny is convinced the S&P 500 will remain flat or slightly appreciate over the next three
months, but by no more than $100.
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Students can apply the analysis from Question #5 and use the
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following formula for P&L:

P&L = C + min{ST, K} – S0

a. Brett’s best option is to buy the ETF selling OTM calls (K = $4,800), as it will enable him to realize
the S&P 500’s upside up to $4,800, resulting in a higher return than forgoing this upside in exchange
for higher premiums from the other two ETFs. In fact, if Brett is so confident, he is best off buying a
non-covered version to realize the full upside.
b. CJ should buy the ETF selling ITM calls (K = $4,000), as it offers the greatest downside protection due
to the higher guaranteed call premiums. Since CJ does not believe the S&P 500 will gain value, he is not
worried about forgoing upside, which makes him better off selecting the highest-yielding alternative.
c. From the P&L diagram in Question #5, the at-the-money ETF (K = $4,400) performs best when ST is

The Case Solution Starts From page 7

, EXHIBIT 1: S&P 500 COVERED CALL ETF PAYOFF DIAGRAM (PERCENTAGE COVERED
VARIES)

Payoff Diagram
$5,000.00
$4,900.00
$4,800.00
$4,700.00
$4,600.00
$4,500.00
$4,400.00
$4,300.00
$4,200.00
$4,100.00
$4,000.00
$3,900.00

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$3,800.00

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Payoff (0% Covered)

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Payoff (50% Covered) Payoff (100% Covered)
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EXHIBIT 2: S&P 500 COVERED CALL ETF P&L DIAGRAM (PERCENTAGE COVERED VARIES)
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The Case Solution Starts From page 7

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