Canadian Securities Course (CSC) Level 2 Practice Exam

What management constraints are associated with Covered Call Exchange Traded Funds?

1. Focus on research, exploration, and development

2. High yield and high volatility

3. High management expense ratio

4. Use long-term strategies for equities and options

The correct answer is: Use long-term strategies for equities and options

The correct choice highlights the characteristic of Covered Call Exchange Traded Funds (ETFs) in their investment management approach. Covered Call ETFs involve a strategy whereby the portfolio holds long positions in underlying securities and sells call options on those securities. This strategy does have intended implications for the investment strategy, which can be considered long-term because it aims for potential income generation through option premiums, while still holding the underlying assets. In this context, the long-term nature of the equity investments complements the strategy's objectives—providing income through options while maintaining exposure to equity markets. Managers of these ETFs often adopt this long-term approach to balance the benefits of the income from call writing with the potential for capital appreciation. Other options do not accurately reflect the management constraints specific to Covered Call ETFs. For instance, focusing on research, exploration, and development is more relevant to sectors like mining or tech rather than ETFs employing an options strategy. Similarly, while high yield and volatility may be associated with certain types of investments, it does not specifically pertain to the management constraints of Covered Call ETFs. Lastly, while management expense ratios may vary, they do not uniquely characterize the management approach or constraints of Covered Call ETFs.