Covered call strategies combine equity exposure with options-based income generation in investment portfolios. As investors navigate through both a lower interest rate environment and equity market volatility, covered call strategies have recently grown in popularity for their potential for attractive cash flows, reduced volatility (relative to standard equity-only approaches) and diversification benefits in investment portfolios.  

This article explores: 

• Why covered call strategies are growing in popularity
• How they work and perform in various market environments  
• Canada Life’s new enhanced equity income fund suite 
  

Why covered call strategies are booming  

Covered call strategies have surged in recent years: 

• Canada: There were a total of 192 covered call ETFs within the multiverse of Canadian investment funds as of the end of 2024, of which 49 covered call funds were launched in 2024 alone (ISS Market Intelligence Simfund Canada). 
• U.S.: Covered call ETFs have seen flows accelerate quickly, with US$35.9 billion moving into the covered call space year-to-date (end of July 2025), contributing to a total of US$128 billion in assets under management (NBF ETF Research).
  

This recent popularity is understandable as it comes at a time of low interest rates and increased equity market volatility.

How covered call strategies work

A covered call strategy involves selling call options on an underlying security (for example, stocks or ETFs) currently being held, to collect premiums. The key benefits of a covered call strategy are:  

• Modest growth from exposure to the underlying security 
• Less volatility compared to broad-based benchmarks 
• Tax-efficient cash flows beyond typical dividend yields ¹ 

Performance across market conditions  

Covered call strategies tend to perform well in:  

• Range-bound/sideways markets: where the premiums can lead to outperformance 
• Down markets: where there’s still tail risk but cushioned with the premiums 
• Moderately bullish markets: where the premiums can keep pace 
• Expensive equity priced markets: to exchange upside for income  

However, there are some limitations to their benefits that an investor must be aware of: 

• There’s limited potential upside, as underlying equity gains are capped 
• They don’t fully protect on the downside, as premiums only provide a partial cushion  

Covered call strategies may be undesirable in a strongly rallying market, as they will lag behind the equity market.

Introducing Canada Life enhanced equity income funds 

As investors navigate challenging markets, Canada Life Investment Management Ltd. and Canada Life have introduced three new enhanced equity income funds, available as both mutual and segregated funds, that use covered call strategies: 

The funds’ objectives are to provide steady income ¹ with the potential for long-term capital appreciation by investing in Canadian, U.S. and international equities, as applicable, as well as selling call options (also known as writing covered calls).  

The funds invest in one or more ETFs to gain exposure to the respective equity markets and use an actively managed call option writing program. This aims to generate cash flow ¹ and reduce negative returns by collecting premiums from sold call options. 

The covered call strategies in these funds include holding one or more underlying ETFs, providing long equity exposure to each region (Canada, U.S. and international markets) and writing call options on a portion of the ETF’s exposure.  

These strategies can support investors who seek cash flow ¹ from their investments or would like the potential for modest capital growth while having some risk mitigation to market downturns.  

There are several unique features that differentiate these funds from many other covered call strategies: 

• The sub-advisor will generally write calls on 30 to 60% of the notional value of the underlying ETFs. This leaves the remaining portion of the ETF “uncovered”, which will allow this portion to participate fully in any price appreciation; however, this portion would also participate fully in any price declines.
• The sub-advisor uses overlapping expiries to reduce ‘point in time’ risk. They implement this by writing options monthly, rolling with weekly overlaps.
• In the event of large up or down moves, the sub-advisor has the flexibility to buy back the call options and re-strike to rebalance the fund’s risk profile. 

An important consideration is the complexity of the covered call strategy. The active management approach in selectively writing call options in different market environments calls for a specialized and experienced portfolio manager with a proven track record in the space. 

ILIM: the sub-advisor to the new Canada Life enhanced equity income funds 

Irish Life Investment Managers (ILIM) has significant expertise in derivatives, having employed option overlay strategies since 2011. ILIM manages over €1.1 billion in the option space and employs a component of this option strategy in the Canada Life Risk Managed Portfolios. ILIM uses option strategies to manage risk and enhance risk-adjusted returns. They structure bespoke risk management strategies using options for institutional clients and manages periodic buy-and-hold option strategies around single market events. ILIM has experience in multiple forms of implementation: 

• Overwriting equity portfolios
• Underwriting the market
• Bespoke solutions for institutional clients 

The call overwriting strategy used in these funds leverages ILIM’s expertise and depth of experience managing option overlay strategies and includes the following:

• Short dated call options for optimized income generation 
• Overlapping expiries to minimize ‘point in time risk’
• Flexibility to rebalance delta (the sensitivity of the option’s price to changes in the price of the underlying asset) after large market moves 

Investment Manager Research (IMR) team: Our role in selecting best-in-class managers 

Canada Life offers a full and diversified suite of investment funds across major asset classes. IMR believes that no single asset manager can excel across every asset class. That’s why we use a multi-manager, best-in-class sub-advisor approach that draws on several management styles, investment philosophies and risk management strategies from around the world.

The IMR team selects and oversees these best-in-class sub-advisors across Canada Life’s mutual and segregated fund platforms. With more than 100 years of combined experience in wealth management, the IMR team applies a rigorous and objective governance process to select, continuously monitor and evaluate sub-advisors on our shelf. This helps align our high standards and investment goals. 

The views expressed in this commentary are those of Canada Life Investment Management and Canada Life as at the date of publication and are subject to change without notice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their advisor for advice based on their specific circumstances. The content of this material (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.  

This material may contain forward-looking information that reflects our or third-party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of September 25, 2025. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise. 

Mutual fund disclaimers

Canada Life Mutual Funds are managed by Canada Life Investment Management Ltd. The funds are distributed by Quadrus Investment Services Ltd., IPC Investment Corporation and IPC Securities Corporation, and may also be available through other authorized dealers in Canada. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. 

The Funds seek to generate income and long-term capital growth through an options-based strategy designed to enhance cash flow and reduce portfolio volatility. The Funds aim to do this by selling (writing) call options on an equity index. Distributions to unitholders will depend on the yield from the underlying equity holdings and premiums from the written options and are not guaranteed. The amount and frequency of these distributions may vary with market conditions. Any portion of a distribution in excess of a Fund’s current and accumulated earnings and profits will be classified as a return of capital and reflects a return of the investor’s principal, not income or yield. Writing call options carries risks, including potential losses if the underlying assets must be sold below market value. Option premiums may underperform direct equity investments. Please refer to the Funds’ prospectus for more details of these and other risks.

The payment of distributions is not guaranteed and may fluctuate. The payment of distributions should not be confused with a fund’s performance, rate of return or yield. If distributions paid by the fund are greater than the performance of the fund, your original investment will shrink. Distributions paid as a result of capital gains realized by a fund, and income and dividends earned by a fund are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, you will have to pay capital gains tax on the amount below zero.

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