Evolve's Covered Call And Cash Alternative ETFs Gaining Popularity As High-Interest Rates And Market Volatility Drive Investors Toward Lower Risk Yield Opportunities

Evolve ETFs is one of the fastest-growing ETF issuers in Canada, nearly tripling its assets under management (AUM) in the last year from $2 billion in 2022 to $6 billion as of May 31, 2023. The company credits its diversified portfolio of 25 innovative ETFs with driving that growth because diversity allowed it to capitalize on changing trends in the market. 

“In the first year, a lot of our success came from Canadian preferred share funds. Then, the next couple of years, it came from disruptive technology and cryptocurrency. In the last year and a half, it’s been driven more by cash alternatives and covered call funds,” explained Raj Lala, the President and CEO of Evolve. Here’s a closer look at those cash alternatives and covered call funds that are generating the momentum behind the company’s most recent growth. 

Evolve’s Covered Call ETFs Balance Enhanced Yield With Steady Capital Gains

Evolve’s covered call ETFs are designed for income-seeking investors, the kind who would normally gravitate to dividend stocks or bonds. In the recent bear market, those staple investment vehicles have become riskier and less consistent than conservative income investors would like. 

Evolve uses a covered call strategy within its equity income ETFs, like CALL or ESPX, to give investors an income-generating tool with the potential to generate attractive yields and monthly income.

A covered call is a trading strategy that uses options to generate extra yield while minimizing downside risk. The trader sells a call option—a contract giving the holder the right to buy a certain stock at a set price—for a stock they already own.

If the option expires without being exercised, the trader gets to keep their shares and pocket the additional income they generated from selling the call option. If the buyer exercises the option, the trader already owns the underlying shares they have to sell, so they aren’t exposed to the unlimited risk if the stock soars before the option expires. Plus in that scenario, the income from selling the option makes up for some of the losses. 

Covered Call strategies also provide a more tax-efficient form of income since the option premiums are taxed as capital gains rather than traditional income. 

Covered call ETFs are a way for investors to gain exposure to that kind of strategy without having to do the exhaustive market analysis and active trading that’s usually required to generate income from it. But not all covered call ETFs are created equal. Here are some of the ways Evolve maximizes the yield of its equity income ETFs:

• Build index-based portfolios focused solely on historically resilient market sectors with sound fundamentals so that the underlying stocks themselves have strong potential for long-term gain. 
• Cap the covered call overlays at 33% of underlying assets so that the fund doesn’t miss out on the potential upside of those underlying stocks by selling 100% of its holdings. 
• Apply an actively managed covered call overlay so that Evolve can factor in things like changes in implied volatility, momentum, tax-loss selling, and other opportunities that systematic covered call approaches may miss. 

The goal is to craft a strong ETF with a portfolio of stocks with a covered call layer on top of it as an added source of income. 

Cash Alternative ETFs Are A Flexible Tool For Capturing Yield In A High-Interest Rate Environment

The cash alternative ETFs that Evolve offers are also aimed at yield-seeking investors who want to minimize risk. Evolve’s High Interest Savings Account Fund (HISA) is a good example of innovative forward thinking as the fund was created in November of 2019 and now has assets over $4 billion.

Evolve’s HISA and HISU feature portfolios made up entirely of Canadian-dollar and U.S. dollar-denominated cash deposits at some of Canada's 'big six' banks. 

Evolve says the two ETFs gained in popularity through 2022. “Last year, cash was a very important topic for most investors because you had the combination of a declining market, high inflation, and rates moving up quickly,” Lala said. “So, all of the sudden, cash could earn a meaningful rate of interest.”

That potential for meaningful yield along with the significantly lower risk of holding cash compared to the volatility investors were seeing in the stock market made cash an attractive asset for many income investors. 

Following the success of HISA and HISU, Evolve recently launched two new money market funds, Premium Cash Management Fund MCAD and US Premium Cash Management Fund MUSD, as the newest additions to the company's cash solutions suite.

To this effect, Evolve’s cash solutions may differ from other cash investments which may come with withdrawal restrictions, minimum balances, or a slow compounding frequency. To generate yield, investors would need to keep cash sitting in their accounts for months or longer. In the meantime, they could miss out on a rebounding market or other investment opportunities. 

HISA and HISU give investors an alternative that addresses those limitations. Investors can enjoy regular monthly distributions from the fund without sacrificing liquidity. As soon as other investment opportunities come up, they can sell the ETF without worrying about withdrawal restrictions or delays. 

Featured photo by Joshua Mayo on Unsplash

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