The Canadian Investor - The Truth About Covered Call ETFs with Ben Felix

Episode Date: October 27, 2025

In this episode, Simon sits down with Ben Felix from PWL Capital to break down the hype around covered call ETFs, why high yields can be misleading, and how these products often underperform simple index funds. They discuss why “easy income” isn’t free, how marketing and influencers fuel bad investing habits, and whether passive investing is distorting markets. Ben also shares his thoughts on gold, Bitcoin, and why keeping your portfolio simple and globally diversified is often the best strategy for long-term success. Tickers of ETFs discussed: ZWB, ZWC, ZSP, XYLD, QYLD, RYLD, VQT, XQT, VCN, XIC Check out our portfolio by going to Jointci.com Our Website Our New Youtube Channel! Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! PWL Capital Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Asset Allocation ETFs | BMO Global Asset Management Sign up for Fiscal.ai for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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Investing is simple, but don't confuse that with thinking it's easy. A stock is not just a ticker. At the end of the day, you have to remember that it's a business. Just my reminder to people who own cyclicals. Don't be surprised. there's a cycle. If there's uncertainty in the markets, there's going to be some great opportunities for investors. This has to be one of the biggest quarters I've seen from this company in quite some time. Welcome back to the Canadian investor podcast. My name is Simone Ben And I'm back here for a special episode with Ben Felix. I'm sure most of our audience are pretty familiar with you. But Ben, before we get started, you want to give us a little bit background

about yourself, what you do, and of course, I guess your YouTube channel, which is a pretty popular, great content, highly recommended as well. Thanks. I appreciate that. Yeah, thanks for having me on the podcast. As you said, Ben Felix, I'm the chief investment officer and a portfolio manager at PWL Capital. We're a Canadian wealth management firm.

We manage around $6 billion in assets for Canadian families and businesses and some institutions. So as the CIO, I kind of set our investment. policy for the firm as a whole. I do a lot of due diligence on investment products. I spend a lot of time figuring out why we should not invest in certain types of products, like we'll talk about some today. We often get client questions about whatever the hot thing is, the hot investment product is, and we need to have a really good, coherent answer for why we are not, or if we do allocate to it, why we do allocate to that product. So that's my professional role. And then I do

have this YouTube channel that I've been running for, I think, seven or eight years now, try and do a video once every two weeks. I've been pretty consistent recently. Hasn't always been consistent, though. And then I've also got a podcast called the Rational Reminder Podcasts that we do weekly episodes. I interview lots of interesting people. And then we also do deep dives on various topics. So that's, that's me in a nutshell.

That's great. And just a quick question, do you have, like, for those interested, a minimum, like, in terms of value, in terms of assets for clients interested in your service? Yeah, we've, we've gone back and forth on that over the years. At the moment, we don't. have a minimum. However, that doesn't mean we'll work with anybody. We charge fees on the assets that we manage. So we do need to have some amount of money to manage for people, but we're pretty flexible with someone who's got a lot of future potential, like they're maybe very high earners and they're saving a lot. So the way we try and describe it now is that we don't have a minimum,

but we do use our discretion in terms of who we'll work with. So if someone's interested, I suggest they just reach out and we'll tell them if they're fit or not, and if they're not, we'll point from the right direction. Okay. And in your recent video about covered call ETFs, and I'm using this a little bit as a transition, you mentioned there's a bunch of different things that you'll offer in terms of services.

Can you mind just going over that? Because I know we have some listeners that don't want financial planners, think they can do it on themselves. And I'll say personally, I think I know investments pretty well, but there are things like taxes, for example, that I would definitely use either a tax professional

or a financial planner because that's a bit outside of my expertise. Yes. So in broad terms, I would say that it's portfolio management is a big piece of it. And that's what we charge fees on. And then the way that we view portfolio management is that to do that really, really well, we have to be involved in the client's financial plan. So we have to know their objectives, their goals, but also their full situation and all of the planning that's been done and is being done. And that does include tax. That does include estate planning, that includes insurance, retirement planning, cash flow planning, all that kind of stuff. So we're very involved on all of those things for our clients. And I mean, it's completely true that investing,

the way that I've described in the past is that investing is a solved problem. That's something that people can do it different ways. But with the tools that we have available to us today in Canada, you can be a great portfolio manager effectively by buying a single ETF. You can buy one of the asset allocation index fund ETFs that we have so many of now in Canada. And that's going to put you on a pretty good path for investing success as long as you can stick with it. So we don't claim to add a ton of value there. We use funds from our company called Dimensional Fund Advisors, which are very similar to index funds. They're a little bit different in a few ways, but it's whatever. I assume that there's not a whole lot of alpha there.

You're not gaining a ton there. But where we do think we add value is on decision-making support, goal setting, tax optimization, estate planning. Continuity for a spouse is a big one where we'll often get someone who's like, you know, like you just said a minute ago, completely financially competent. Like I can manage my own investments, but they'll come and say, listen, I've been doing this for the last 10 years. I'm totally comfortable. However, my spouse is not. And I'm really worried about if something happens to me, what happens to the household's financial plan. And so they'll choose to delegate for that reason. So it's not just about. Maybe we'll talk after this because I feel like I'm in that situation.

Yeah, right, right. But anyways, back to the covered calls. So I know it's been, we've been getting a lot more questions on it. We've done some episodes on it, but clearly not as deep into the data and the weeds as you're too recent or not the too recent, but two very recent videos that you did on the subject. So can you go over some of your findings of benchmarking covered call index CTF versus the same index CTF, but some cash as well? and just understand and explain the logic behind that because I think some who invests in

covered call index ETFs do it as kind of mental gymnastics of lack of better word because they don't have to sell the actual shares in the ETFs. They can just collect the income and lift all of them. Yeah. So I think that there is a lot of mental gymnastics or mental accounting that goes on with covered call funds. What I did for the recent couple of videos is I compared the performance, the total return performance of covered call ETFs to ETFs that simply invest in the same underlying assets as the covered call fund, but don't have covered calls, like just a regular index ETF.

There are a bunch of funds from BMO and some from Global X that have pretty long histories. And I want to be clear, like, there's nothing necessarily wrong with these products. There's nothing necessarily wrong with the concept of covered calls as an investment strategy. I think the problem that I have with them is the way that they are marketed and sold and the way that investors interpret what they're getting from them. I think that's where all of the errors are happening. If someone wants to do this and fully understands the implications and fully understands what they're doing, that's fine. And maybe some institutional manager does this for some specific reason that makes sense for their institution. But I think retail investors are

being misled, really, in what these things accomplish. So what I did is I took covered call funds that invest in whatever, say S&PTSX index and write covered calls. And I compared that to an ETF to just invests in the S&PTSX. And I just said, which one has better performance? And what I found is that when you look over any meaningfully long period of time, most of the time, the covered call funds have underperformed. Now, that should not be surprising to anyone who understands what is happening with a covered call because covered calls. are reducing your exposure to the underlying equity. So if we believe that stocks or an index or whatever has positive expected returns, you should expect to earn lower returns by writing covered calls

because you're effectively shorting exposure to the equity by writing the call option on it. So you're reducing your exposure to the equity. So one of the things that I did to your question is I took five funds that had at least 10 years of history. And I picked a 10 year time period, 10 years ending, whatever, probably September 2025. And I just compared their 10 year outcomes, covered call funds, all of them underperformed. And then to address a common question about covered calls, I looked at a withdrawal scenario. So I said, okay, we're going to spend the distributions from the covered call fund. And we're going to see and spend the exact same dollar amount from the underlying equity.

And we're going to see if that magically makes covered call funds better. It does not, which I was not supposed to. by, but I think a lot of people believe that somehow... I was not either. Right. You shouldn't, that nobody should be. But you said it earlier, you don't have to sell shares, and that makes people think that somehow you're going to be better off with the covered call fund than with the underlying

if you need the income. Anyway, so covered call funds underperform, even when you had to do withdrawals. And then the other thing that I thought was interesting is I thought, okay, if covered calls reduce exposure to the underlying equity, and we know they're underperforming. there's probably some allocation to cash and the underlying, so some mix between cash and the underlying equities, that ends up giving you a pretty similar result to cover calls. So I looked at that for the five funds that I had in my model, and I found that on average, it was about 26 percent, a high interest savings account allocation that gives you a similar

results. So that for those five pairs of funds, on average, I had to allocate 26 percent to a high interest savings account, 26 percent to the underlying equity. to get the same result over 10 years as investing in the covered call for that same equity. So you could probably even lower that a tiny bit if you use something like treasury bills, right, that are high liquidity and tends to yield a little higher than high-insurance savings account? Yeah, you probably could.

Yeah. Yeah. So I thought that was interesting because it's like, I think if you told most people that a covered call is like investing 25% of your portfolio in cash in your. in high interest savings. I think most people recognize that's like that's probably going to lower your expected returns, but then there's this disconnect where covered calls are magically perceived as not lowering your expected returns, but I don't think that's the right way to think about it. Yeah. I mean, is it just because it's easy? Maybe it's just that. It's just too,

it's very easy for people to just collect the income they get from these covered calls versus having a plan and having some cash aside to minimize the sequence of return risk. Is that is, Is it just that simple? So I don't think it does minimize sequence of returns risk. I think that's another perception that's, that's wrong. I don't know. No, I mean, to have cash minimize that so you can rely on your cash to get those withdrawals is what.

Oh, yeah, okay, okay. Yeah. Yeah. I mean, even the cash, I don't think that helps with sequence of returns risk. That's another interesting one where it's like when you look at for long term investors, does holding a big chunk of cash help? And it doesn't. it makes you a little bit worse off, which is counterintuitive, but it lowers your

expected returns, enough that even though sequence of returns can be an issue, holding cash still doesn't help much. Anyway, on covered calls, is it the ease of at all? I think that's a big part of it, where it is hard to figure out how much you can withdraw from a portfolio. That's like a truly hard problem. I don't think that covered calls solve that problem, but I think that they give the perception that it has been solved because you're getting this money. deposit into your bank account or into your investment account. And it's like, hey, this money arrived here. It must be okay for me to spend it. And that does matter to some people and not having to think about how much to sell or go through the actual process of doing a sale and maybe having

to think about taxes and transaction costs and all that stuff. Those are all real frictions. And I do think that's one of the attractions that people have to cover calls. Yeah. And why do you think is one of the things you mentioned a few times in your video is obviously you're capping your upside with covered call ETFs. So that's pretty, to me, it's pretty easy to understand, right? You you cap your upside to essentially the, the strike price plus whatever the premium that you got. But it seems like it's something that there's a lot of difficulty understanding. And then they just automatically think that you're also, you know, going to have a lot less downside associated with that. And sure, you're going to have a little less downside, essentially

the premium that you got in exchange for it. But it's kind of not a fair tradeoff if you're asking me and you definitely demonstrated that. So why do you think a lot of investors have that trouble understanding that tradeoff that you're doing and it's not really a very fair tradeoff when you think about it, especially when markets tend to go up over long periods of time, not down? I mean, it's fair. Fair is a tough one here because it should be fair, right? The way that options are priced, you should be getting enough premium to compensate for the lost upside when you take into account the fact that you're lowering your beta, your exposure to the equity. But I don't know, when you think about the way that returns matter for long-term

investors, those upside returns matter a lot. The fact that there's been some mean reversion historically in stock returns matters a lot. And I think that you make that go away with covered calls. So I don't know. I mean, there's an interesting question there of who, who are options is priced fairly for. And maybe for long-term investors who care about those things, maybe you could say they're not priced fairly. But fairness aside and efficient pricing of options aside, I think that the big problem with asymmetry is what you said. It's that it eliminates the right tail of the distribution of stock returns. Like if we think about stock returns as a normal distribution, which they're not normally distributed, but just as a simple model, we think about them as

normally distributed. So that means you've got some really, really good returns, sometimes, some really bad returns, sometimes. Most returns are concentrated around whatever, the average that we expect. So there's this normal distribution. When you're doing covered calls, you're cutting off the right tail of the distribution. And that right tail matters a lot, period. That matters a lot for long-term investors. But it matters extra a lot when you consider the mean reversion aspect of it. Because when markets drop, typically what happens, is you've got positive returns after that. That's not a guarantee. It stocks don't always go up. However, when you look in historical data from stock markets all around the world going back as far as

we have data, what tends to happen after crashes is recoveries. And there's probably survivor bias in there and the fact that we've existed with this system as long as we have. So it's going to look that way. But in any case, with covered calls, you're eliminating that. So when you have a crash on the subsequent recovery, you're not going to participate, which I think, make stocks riskier for long-term investors than they are when you have the mean reversion working in your favor. So that's all problematic. I don't think that investors are trained to recognize the effect of asymmetry. And I guess I didn't really mention on the downside with covered calls. So your upside is capped because of the way that the way that writing the option works,

the downside stocks drop. You have a little bit of a buffer because you are getting option premiums that the underlying is not getting. But it's a small buffer. Like if stocks drop 40%, you might get 5% less of a drop or something like that because option premiums might go up in a high volatility period, but it's not going to protect you as much as you're going to give up on the upside. So not great. And investors are trained to think about risk as volatility and to think about sharp ratios. None of those metrics account for the asymmetry. that gets introduced with options. So I think it messes with people's mental model of what is risk, what is a risk-adjusted

return. And this is something that in academia, it's been recognized since probably the early 2000s. There's some big papers, highly cited papers, talking about how you need different risk measures when you introduce options because of the asymmetry. But I don't think that's largely filtered into retail investor circles. So I don't think it's well understood. I don't think investments are trained to look for asymmetry, and I think it's one of the biggest problems with covered calls for long-term investors.

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sometimes splashing, other times poking at the water with her little pink net, trying to catch frogs. Getting her out for dinner was always a challenge, but after days like that, she went down so easily at bedtime. That gave my wife and I the chance to finally unwind in the hot tub and watch a sunset together. Having a cozy place to come back to made the whole trip feel effortless and special. It also got us thinking about our own place. If someone else's home could be such a perfect fit for us, maybe ours could be for another family too. Hosting our home on Airbnb would let them make their own memories in our beautiful neighborhood while giving us a little extra money to put towards our next trip. And the nice thing is the flexibility hosting provides

so we can decide when it makes sense to host our home. Your home might be worth more than you think. Find out how much at Airbnb.ca slash host. Do you want to also explain because some of these ETFs are yielding 10% plus, right, in terms of distribution that they're saying they're giving. And you want to explain a bit how some are yielding less, some are yielding more and what kind of strategies the ETFs will typically take. I know you talked in your videos that they'll just basically write some covered calls that are even closer at the money. And I guess you're just increasing the risk that you're just capping your upside even more by doing that. Well, yeah. So this is one of the issues with those really, really high yielding covered

call funds is that how do you get higher yields? While you can write closer to the money or at the money options, higher delta options are going to have higher premiums. But higher delta options also means you're shorter. Delta is like how much exposure you have to the underlying stock. So if you're shorting higher delta options, it also means that you're reducing your exposure, mostly to the upside of the underlying. So there's another big issue there where the yields on these funds are generally speaking, going to be inversely related to their expected total returns. So if you go and look for the highest yielding fund, you're probably finding the lowest expected return or the biggest reduction in expected return compared to the underlying

fund, which when you frame it that way is not great. Like no one wants the biggest reduction in their expected returns, but they don't see that. They see the yield and they're marketed. Like if you look at the fund literature and the fund promotional web pages, they're marketed like, here's the yield of the TSX, here's the yield of this fund. And people think, wow, I want to hire yield, but they don't realize that they're not, that the yield is not the expected return. Like if you find a 10% yielding fund, you're not going to get a 10% return. You're going to get a 10% cash distribution, but that is going to be reducing your expected total return. And so if we go and say, okay, I want to hire a higher yield, a higher distribution, that's going to lower your expected

return because of the way option pricing works. So I think that's another one of the big, big problems with the way that these are marketed and sold is that they're marketed and sold on the yield and investors are buying them as if the yield is an expected return, but it's actually inversely related to the expected total return. Yeah, and I know these covered call ETFs for the most part. I think some of the older ones you mentioned, I think some of the BMO ones in your videos that or have like a what 10 15 years track record so but for the most part there's been a explosion lack of better words in the last five years I've noticed and there's just more and more promotion about them and one of the common things I notice with Canadian investor

especially dividend investors so I'm not saying they're they're all investing cover call ETS but they'll say something like oh this bank has been paying a dividend for 100 years so for sure it'll continue where my argument is always like what does a matter what happened 100 or 50 years ago. And it's good that they have a track record. But going to that, like, I've seen comments and the perception that these covered call ETFs will just perpetually keep paying the same distribution. So do you want to go over some of the potential scenarios, especially in a sideways or prolonged bear market? Because I can very easily see that it could be funds or an ETFs that end up having to cut the distribution after

they try to sustain it for a decent period of time by just selling covered call or call option closer, closer to the money or in the money. And then at some point, they just decide, you know what, we'll start selling assets to keep the distribution as is. And then at some point, they kind of face reality and just say, okay, we have to cut the distribution. And how do you agree that could be a potential scenario? If not, feel free to say not. and what, like, that could be very destructive in terms of capital. And it's not just a scenario of selling assets. I think if we have a big crash and the covered call funds are not able to participate in the

recovery, that can also be destructive to the net asset value, to the underlying, the value of the underlying assets. A lot of the funds that are out there now, like there is one fund in the U.S., a U.S. listed ETF that did launch right before the great financial crisis. in price only terms, keeping in mind that the U.S. market, it crashed back then, as everybody knows, it recovered and then some. Obviously, it's like the best performing market globally since then, at least major market. But the price level of that ETF, if you exclude distributions, is below what it launched it. Like if you put $10,000 into it back then, you have less than that

now, despite what has happened with the U.S. market over that period. Most of the other funds, that are around, like the Canadian ones you mentioned have been around for a while, have existed through a period where stocks have gone up. Like there's been volatility. There will always be volatility. I think it's another interesting point, actually, in the sideways market comment, people will often say, well, cover calls will do well on a sideways market. I don't think that there's a such thing as a sideways market.

Like, when the market goes sideways, it doesn't go sideways. It's volatile and it has a flat return, but it doesn't just go flat. I mean, even like the big bear markets, and you said the great. financial crisis, like there were times where it like increased 10, 15 percent and then drop back down. I don't think a lot of people realize that. Yeah. So I think the sideways market argument is a bit of a myth. Yeah, I think that there are scenarios where the net asset value of these funds can be eroded and destroyed. And I think that that would be a pretty nasty wake call for people investing in these things, assuming that the distributions are perpetually

sustainable. And I don't think that we've been through any periods where a lot of the funds that exist today would have struggled with that type of thing. So now, like you said, there's been this massive influx of all these products being launched. And a lot of them are really niche. Like some of them are holding very concentrated portfolios of stocks. Some of them are holding single stocks. And it's like, I don't know, man, you know, portfolios like that covered calls aside, and a lot of these are using leverage too, but covered calls aside, a concentrated portfolio of stocks or a sector portfolio, there's a good chance that that performs poorly over a long of time. And I think adding a covered call overlay on there is only going to make that

worse. And you add leverage on there. We haven't even talked about leverage. A lot of these funds are, they're levering up 25%. Now, what does leverage do without covered calls? It amplifies your upside and your downside. That's also true with covered calls, but covered calls have a capped upside. So that asymmetry in the distribution of returns, like you look at some of these leveraged covered call funds, their downside is much worse than the underlying because they're levered up, but they're still capped on the upside. And so it's just like, I don't know, I, I, I'm worried that, and this is why I've made a few videos.

I've got one more video coming on this topic. I'm worried that a lot of people are putting a lot of faith in, in these products, thinking that it's going to make a big difference for the future. And I feel sympathy for people because a lot of people, maybe they're struggling, maybe they really want to retire, they don't want to keep working. And they see these as this path to freedom and they see hope in these products. because the distributions are so high that you don't need to have as much in savings to retire on them. But I'm very concerned that they're not as sustainable as people investing in them

think. Oh, I mean, I've seen posts of people having, I think, $60,000, $70,000 TFSAs and thinking they can get $22,000 yearly income. Like, if something is too good, like there's no free lunch in investing. And I think that's a good reminder. Like, if something sounds too good to be true, it probably is. Totally. Yeah. And I guess my rule of thumb, like when there's a new product or something that I see that's being more and more out there in terms of marketing and being pushed is definitely like Bay Street and Wall Street, they're very good at marketing and they make good money

on fees and we've said that a whole lot often on the podcast. And anytime I see a kind of product that's being like out there being pushed, I don't know, my alarm bells without knowing the product necessarily. my alarm bells go off. I don't know. Is that a good rule of thumb for people listening? It is absolutely a good rule of thumb. I think we've seen this with private assets over the last five years and I think that's starting to show some cracks now and people are realizing maybe that wasn't such a great thing to be allocating to. I'd lock up your capital for a long period of time. Yeah. Yeah. Well, I mean, I think that private markets have had, are starting to show

a lot of the issues from the last sort of 10 years where a lot of people decided that it was a good idea to allocate huge amounts of capital to those asset classes. And I think returns have started to falter a little bit. And now investors are realizing that they're not so easy to get out of. Anyway, that's a whole other whole other conversation. But I think that as a model, anytime that Wall Street and Base Street are pushing something, whether it's private assets, covered calls, used to be actively managed funds. It's definitely a good model to be skeptical.

This is why I started making videos on covered calls because they are being marketed like crazy to retail investors. And that's never a good sign when a lot of companies charging, you know, pretty high fees on a financial product are telling retail investors and paying influencers and doing everything they can to get in front of, you know, regular people who are trying to save for their retirement, trying to sell them a product, that's, that's not a good sign. So these are clearly profitable. You know, it's really interesting.

I was thinking about this the other day. We've kind of come full circle where 10 years. ago, I started in this industry 13 years ago. 13 years ago, actively managed funds were still the thing. When I started, the firm that I started working at, you could not have a fee-based account for a client. You had to sell commission-based funds. A lot of the industry was still like that back then. Investors were kind of starting to wake up a little bit, like the Canadian Couch Potato blog got popular around then, and people started to realize that actively managed funds weren't so good, and that paying 2% and fees wasn't so good, and it was detrimental to your

retirement savings and all that kind of stuff. And I think there was a shift in investor sentiment and psychology where people started thinking, I want to reduce my fees. I want to use low cost index funds. Canada has been a bit slower to adopt those changes than the U.S. market, but I think it's still been happening in Canada and people have become more aware. And now it's like the financial industry has found this new avenue to market junk. I mean, I think it's like we hear about AI slop. I think there's the phenomenon now of ETF slop, where ETF companies are just launching junk, I would call it, that appeals to various investor biases and desires, and they've

found ways to charge high fees. Like, you have to think, index funds are not good for the financial industry, because you're going to pay six basis points or whatever to invest in an index fund, and that's not good for the companies issuing products. And the other thing there is, if you're a smaller ETF company, you're not going to go and compete with Vanguard and BlackRock on price on total market index funds. So what happens? Companies have to find other stuff to market. It's not going to be traditional actively managed funds at a 2% fee because people don't want that anymore. But you find something like covered calls that appeals to the mental accounting bias. It appeals to people's desire to replace their income and be financially independent and all that stuff. And all of a sudden, you found a way where you can charge 1% when you account for the cost.

leverage, maybe more, like I've seen some of these funds with MERs close to 2% when you account for the cost of the underlying leverage, full circle, where the financial industry is found a way to charge the same kind of fees that I think people have been wanting to get away from, just wrapped up in a different way and marketed in a product that somehow seems more appealing or better than the actively managed funds that people had largely realized don't make a lot of sense. Yeah, one of the terms they use for new products I've noticed is Democrat You're a democracy in terms of investing, sorry, the French accent struggling with that word a little bit. Yeah, democratizing investing.

There you go. I think that's one of the things I think we saw a lot with private assets, democratizing access to private markets. I think anytime you hear the financial industry telling you that they're democratizing access to an asset class, it's probably not a good sign. Yeah, no, exactly. Having cash on hand is essential for any business. Traditional business accounts hit you with high fees while paying little to no interest on the cash you need for day-to-day operations. That was our experience too,

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It also got us thinking about our own place. If someone else's home could be such a perfect fit for us, maybe ours could be for another family too. Hosting our home on Airbnb would let them make their own memories in our beautiful neighborhood while giving us a little extra money to put towards our next trip. And the nice thing is the flexibility hosting provides so we can decide when it makes sense to host our home. Your home might be worth more than you think. Find out how much at Airbnb.ca.com slash host. Kind of talking about index funds. I want to play devil's advocate a little bit here just because I'm a big believer in index funds. I used to work in the pension retirement space.

We had the defined benefit, also the fine contribution plan. And both plans had, well, defined benefits use mainly index indices to invest. And the defined contribution was primarily index options, obviously institutional grade for people. So I'm a big believer in that. But I've also been reading and listening to some people that do exercise caution. I don't know if you're familiar with Mike Green in terms of, yeah, is concerned that passive investing might not be as passive because obviously an SNP is actually, you know, doing the selection.

And the idea that the market cap weighted in the sea concentrate more and more capital into the largest companies and you have this automatic buying from large pension funds, from retirements that buy on this systematic basis. And then if we do happen to have a severe recession, then you could have. outflows that will actually swing over to the other side and just exacerbate a big market correction. So do you see any validity in those critics? And is there like an actual risk,

like a systemic risk because index investing has become so popular? Yeah. So I've had Mike Green on my podcast twice. And him and I email back and forth quite a bit. I'd consider him a bit of a friend at least professionally. So yeah, I'm very familiar with his arguments. I agree passive is a terrible name for indexing, index investing, even forgetting about the S&P 500, which is a whole other thing because the S&P 500 is determined by a committee. It looks a lot like an actively managed fund when you actually peel back what's happening with it. But a lot of index funds. So even just a pure total market cap weighted index fund, it still has a lot of active decisions going on under the hood. They still have to decide what to include, when to rebalance,

when to incorporate changes to the market like IPOs and new share issuance and buybacks, how to deal with corporate actions. Like it's passive is just a terrible name for it. Now, that being said, well, it is a terrible name relative to everything else. It is kind of passive because like if you just take the market capitalization weight of all stocks at a point in time, that's a pretty good reflection of the market as it exists based on the way that all the stocks in the market have been priced. So that's, you know, it is it is kind of passive, relatively speaking.

It's just not very passive in absolute terms. I think Mike's argument, and I'll kind of explain as there. I mean, because I don't know if it's always super well understood. I think it's plausible that index funds are affecting markets. And that's something that not just Mike is saying. There are other academics who are taking different approaches to show that index funds are having an effect on markets in different ways. So I think that's a completely-

Like distorting valuations, for example, right? Yeah, so I'll explain Mike's argument on distorting valuations. Yeah, that's one perspective. There's potential concerns about corporate governance, market efficiency, which are all, they're all sort of different things, depending on how you define and approach the analysis. Mike's issue, and it took me a while to understand this, Mike's issue is not market efficiency. He's not worried that index funds are making stock prices wrong necessarily or not reflecting

their fundamentals. His concern is that flows into passive are reducing the price elasticity of demand for larger stocks more than for smaller stocks. So that's a kind of technical way to say that like large stock prices get more sensitive to demand than small stock prices. Because like if you think about if elasticity is the same across all stocks, the fact that you're buying more of a larger stock when you invest in an index fund, that shouldn't matter to the cross section of prices because the fact that you're buying more is proportional

to the size of that company and that shouldn't boost its price more than it boosts to smaller companies. That's not quite the argument. The argument is that index fund ownership reduces price elasticity, meaning that the same amount of demand for a large stock will change its price more than the same amount of demand for a smaller stock. And that gets worse and worse, the more money goes into index funds. Price elasticity gets lower and lower, meaning prices get more and more sensitive to demand.

So, like, it's an interesting argument. I think Mike makes a pretty good case for it. It is one plausible explanation for what we have seen in the U.S. market where the largest stocks have just gone up and up and their valuations have gone up and up. It's not the only explanation. The other explanation could be that those companies have been absolutely crushing it, which is also true. But it is certainly one explanation and it does coincide with the rise in index funds. So, you know, I think it's worth being aware of Mike's argument. I think Mike does a very good job articulating it. I think Mike is genuinely concerned about this. And to what you mentioned a minute ago, he is concerned that as capital

flows into index funds, we are seeing this cross-sectional effect where large companies are having their prices increased disproportionately relative to smaller companies. And that in the event that flows reverse and there's capital leaving index funds, then it's also tricky. What does that actually mean because money doesn't leave index funds. There's a buyer and there's a seller. So you have to think about where is the flow going? If flows go from active to passive, that can cause the price effect Mike is talking about. If there's a market crash or something and people are selling the investor base of index

funds changes and all that capital flows into a different asset class, then that can change the cross section of prices. But there's no case where money's like leaving the system because for every buyer there has to be a seller. So anyway, I think it's a plausible concern. It's worth being aware of. It's a very good reason to diversify globally. And I think, like I mentioned earlier, that we use dimensional funds. Dimensional funds are basically index funds that own the total market, but they tilt a little bit away from the largest and highest price stocks and toward smaller and lower priced stocks. I think that's sensible all the time. But particularly if this is a

concern and particularly where US valuations are, I think that that type of tilt makes a lot of sense. So it's a great reason to diversify. The other thing with this whole idea is that you can take two equally smart, educated, intelligent people and ask them about this and they'll disagree on whether it's an issue and to what extent. And we actually did that on my podcast. We had Mike Green and Randy Cohen, who's at Harvard. They're two very smart people who don't see eye to eye on this. We had them both in our podcast. We didn't frame it as a debate, but we had this discussion where, you know, they each voiced their points and we tried to come to an agreement and we didn't, but it was, it was really interesting to hear them both reason through whether they think this

is an issue. The other really interesting thing about Mike's concern is that when you talk to Mike about this, and I've done this twice on my podcast, you say, I will go and listen to them because I'm really interested. I've heard Mike talk quite a bit in the past, so I didn't know he was on your podcast. Yeah, no, we had two great conversations. with him. And I've really come to like Mike. So when you ask him, what do we actually do about this? Like, okay, Mike, people are listening to this podcast. What should they do with this information? And the answer is that they should keep investing in index funds, which is funny, right? Because I think Mike's very concerned about this at like a societal level or a policy level,

not so much at a you need to get out of index funds level. Yeah. Because the problem is Mike does, and he says this in our podcast, Mike doesn't know if this is going to be an issue when it will materialize. When will flows reverse and prices drop? We don't know. And until that happens, until it reverses, index funds are very, very difficult to beat. Anyway, so. Well, and to your point of diversifying, right? Like we think, I think a lot of people automatically think of the S&P 500, but there's a whole bunch of indices out there that you could mix and match to get some diversification and not be so weighted towards, you know, the U.S., specifically in terms of geography or the U.S. mega caps, there are strategies that you could use with different indices

to be able to shift away some of that concentration risk, if you'd like that a better word. Yeah. Even without any of those potential issues, like I think those are, they are valid concerns. They're worth being aware of Mike's arguments aside and Mike's, Mike's kind of story or theory aside, just looking at U.S. market valuations, it's like they're really high. You know, we're almost at dot-com level valuations. It probably makes sense to diversify. I think that that is always true, but particularly with the way that things look now. But in Canada, we have, you know, instead of using an S&P 500 ETF, you can use VEQT or XEQT

that's giving you still exposure to the U.S. market. And I'm not saying people should get out of the U.S. market because I could have said the exact same things I'm saying now five years ago. And then you missed out on five years of incredible returns for U.S. stocks. The same thing could be true in the future. But you can have U.S. stocks, Canadian stocks, international developed markets stocks, emerging market stocks, and have much less of an impact if things do go wrong in the U.S. as Mike is predicting. No, no. And I think that it was great to hear your thoughts. And honestly, I will listen

to that because I'm really, I find it pretty fascinating. I always like to challenge my own beliefs, too. So it's something I like to do. I guess here to finish off. And it's something, obviously, you know, Mark McGrath. He's been on the podcast before. And I asked him the same question a couple of years ago when he came on the podcast. And I was just kind of curious to see the evolution of what PWL is seeing in terms of clients being interested in having a percentage of portfolio with gold or Bitcoin as a hedge against stock or debasement, whatever the argument is or over bonds. And I'm just curious, obviously, like maybe there's been a shift in the last few months. with gold or this year at how well it's performed. But what kind of shift have you seen? And

what's the overall philosophy there at PWL capital for those alternative assets, for lack of better words? Yeah. Client demand definitely does ebb and flow, usually with the prices or the performance of something. So we hear more questions about Bitcoin when Bitcoin returns have been positive. We hear more questions about gold. When gold returns have been positive, people had forgotten about gold for a long time because it had not done anything. All of a sudden, and it has really positive returns and people are interested in it again. I think that's interestingly one of our most important roles is to keep people from making decisions after some asset class has performed really well.

There's a lot of good data and research on that being one of the most expensive mistakes that investors make where they get into an asset class or a fund or whatever after it has done well and then they get out after it has done poorly and that leads to underperformance relative to that asset class. So it's like if we say gold returns are going to be whatever percent, investors will tend to earn a lower return than that, whatever that return is by investing that asset class because they'll get in after it's gone up and get out after it's gone down. So we do get some questions. We tend to try to moderate those questions. It's kind of like, you know, if you're, why are you interested in this now as opposed to six months ago or whatever?

And then we try and talk through the reasoning. Usually people end up deciding not to allocate to stuff. It's not part of our investment policy. So we don't have that in our long-term portfolios, either gold or Bitcoin, other than what's included in publicly listed companies. Like there is indirect exposure to both of those things. Particularly, like we have a pretty heavy home country bias in Canada. So the gold particularly has boosted certain parts of our domestic portfolio this year.

this year. Yeah. So we did a recent episode where I think the materials had 80% returns for the first three quarters of this year. It's crazy. Like Canadian small caps this year have been wild. Canadian stocks in general have been great, but Canadian small caps, which we have a slight overweight too using those dimensional funds that I mentioned, Canadian small cap returns

have been incredible this year. Yeah. So anyway, we are seeing some questions, but it's pretty par for the course where anytime something goes up, we get questions about it, and then those questions stop when that thing goes down, it goes down, which often does happen. And we have not changed our strategic allocation. Our investment policy still does not include allocations to Bitcoin or gold. Okay. No, that's interesting. I mean, I do have some gold in my portfolio and some Bitcoin, but I was talking about, I invested in those while back in gold I was talking about it two, three

years ago and a lot of people couldn't have cared less about it. To your point, right? It's just to me, I don't know if it's my personality or the way my brain works. Like when something has had like incredible returns, I kind of, I kind of wait and see. That's just the way I am. I just, yeah, I put on the brakes. I don't get too excited. Maybe it's because I got burned when I first started investing when I was really, really young and learned my lessons. But it is interesting that you see that. And it's kind of a role, a lack of better word, like a psychologist that you'd do a little bit with your clients to just kind of ask them to take a step back sometimes. It's a big part of a role is that psychology and moderating investor behavior, which people

often tend to want to make mistakes. They don't realize that they want to make mistakes, but they want to do things that we know based on huge amounts of research on investor behavior, we know that these things are mistakes. So we have to be well versed in spotting those things before they happen and being able to talk clients through the decision that they're making what the implications are. We can't always stop people from doing certain things, but for the most part, I think we do a pretty good job. I have been super interested in gold's returns recently just because, you know, when you just look at raw data, gold's not a great hedge. It's been super noisy. When stocks don't do well, gold doesn't necessarily do well. In some cases,

stocks have done poorly and gold has done just as poorly and made things worse. Sometimes it's done well, but it's not a hedge. It's uncorrelated, which can still be a good thing. But it's also got a low expected return. So we've just never thought that it made sense. But then living through the current environment where the U.S. is doing a bunch of stuff that's making people maybe think twice about U.S. dollars and U.S. treasuries as the safe asset and seeing that plausibly, I mean, I guess I don't know exactly why the price of gold has gone up, but plausibly that's got something to do with it. And so that type of, I don't know what you'd call that, institutional instability,

seeing the effect, the interaction with Gold's Price, with that type of thing happening in the world, it's like, that's pretty interesting. And even if it's not a hedge when you look in the data, if you can isolate situations like this, and it's like, if it does dwell in those periods, maybe that is worth including. The other issue, though, is that, and it's kind of related to what we were just talking about with investor behavior and investing. after something's gone up, when you look at the history of gold returns, you can track the real price of gold. You go back to the 1970s when gold was priced by the market. And you just say,

if you adjust for inflation, is the real price of gold high or low relative to its own history? And historically, when the real price of gold is high relative to its own history, which it is now, future gold returns tend to be quite low. So that's one of my concerns of the gold right now. If it levels out or if the price drops, maybe, maybe we, we look at adding a small allocation. And that's not a market timing thing. Like, that's not something PWL does, but it's just seeing, seeing its behavior in the environment that we're in now is maybe think, you know, there's something, something potentially interesting there. However, it's not something that I would touch at the moment just because of where the price is. Yeah. And there's other ways like

you mentioned to get exposure, right? Like the miners, clearly if you're, you have a decent exposure to Canada, you'll be able to get exposure. And one of my arguments that I've started saying a couple of years ago was actually back when the U.S. sanction Russia with, you know, U.S. assets, right? So that was one of the arguments that could create some problems from a geopolitical standpoint, just put some countries on notice because you never know who's going to take and get into power in the U.S. And we saw the big shift between the Biden and the Trump administration.

And one of my arguments, the last couple of years that data does show that were central banks around the world have been increasing, increasingly buying gold. And they are for the most part, right? If you're a central bank, you want a certain amount, you're going to be pretty price and sensitive. It's not like an investor, right? Yeah. Yeah, no, it's all interesting stuff. Interesting to see the interactions between gold and current geopolitics. But again, that's something that I'm watching, but we're not going to do anything about.

But I think the real price of gold situation is definitely something to be mindful of. No, exactly. I'll look for a video on in the next few years. That's good. But before we wrap up, anything that you wanted to give in terms of takeaways or maybe like one tip for individual investors, self-directed investors, like that you think is probably the most useful, whether it's something we talked about in this conversation or something completely different?

I think simplicity is like one of the most powerful tools in investing. So we're talking about, you know, covered calls. We're talking about gold and Bitcoin and all this stuff. And it's like all that stuff can matter. Getting those things right can matter, like picking the right product at the right time. But doing that right consistently is really, really hard. I think having a simple portfolio that you understand really well and that you can stick with through whatever is happening in the world.

I think that's probably the most powerful, the most powerful thing that an investor can put in place. having an investment policy that you're comfortable with, that you understand and that you can stick with through good times and bad. I think, well, that's super important. And it's a path to investing success. It's also one of the hardest things for investors to do. I mean, people listening to this podcast, they're probably thinking about this stuff more than the average person, which on the one head is fine. I do that too. I love this stuff. I don't change my portfolio because of it. But I think people who are super keen, super interested, in some cases,

is what's, it's actually interesting. In some cases, they can be at more risk of tinkering. However, they probably put themselves in a better position overall than someone who completely ignores this stuff, either sits in cash or in high fee mutual funds from the bank. But I do think that people who are highly engaged in this stuff, they've got to be able to figure out what they want to invest in as a long-term allocation and then not tinker with it. And I think one of the best tools for that for most people, and we talked about this, is low-cost index funds, which are going give you access to global markets at a low cost, and it's not something that you should have to mess with, even in the Mike Green scenario if you're properly diversified. So keep things simple.

Index funds are a great tool. And the one thing we didn't talk much about is being aware of conflicts of interest. With the covered call stuff, I didn't even realize, like, honestly, that how pervasive it is that people are being paid to talk about these products. I started making videos about this because I thought it was interesting and I saw it coming up a lot. And then a whole bunch of people made of response videos talking about why cover calls are I saw it. I didn't even know those creators existed, but there are a ton of creators who are selling coaching services who are being being sponsored by these ETF companies.

And I was like, wow, I didn't, I knew Finfluencers were an issue regulators were looking at. I didn't realize how severe how in your face it was and how many investors are being influenced by that stuff. So I think being aware of conflict of interest of where someone's coming from. why they're saying what they're saying, I think is super, super important. Yeah. And I mean, it's always been one of my, our biggest things here.

And I'm sure you've been contacted probably by some of these EF providers for paid sponsorship. And like I can attest, they will give you good money. Yeah, it's real money. It's real money. It's really good money. And it's something it's also like stock promotion. We've been contacted many times.

We've always said no, because to me there's more value in being ethical and honest than a short-term gain. And it's also not right. I just don't think it's right. But I can definitely attest to that that it does happen quite a bit. And I find it pretty frustrating. I think you can have sponsors, but do it in a way that's, you know, doesn't compromise your integrity. But anyways, maybe more we maybe we're the exception to the rule. I don't know. Yeah. We've never taken sponsorship money for that same reason. Just we, we've decided that our credibility is more valuable to us in the long run than the dollars we could get from sponsorship. I agree with you. There are ways to do it right. I know a lot of creators who do it well and take are

very, very selective with sponsors and in some cases won't even take sponsors that are finance related at all just to avoid any potential conflicts of interest. So it's possible to be done well, but it's a tricky area for sure. Yeah, definitely. Well, I think those were a fantastic parting word. Ben, thanks again for coming on the podcast. We've had the request for quite some time people wanted to have you as a guest. Hopefully we can do this again. And again, for people interested, you can, I guess, reach out to you or PWL Capital, if they're interested in some of their services that you offer.

Yeah, if people want to learn more about PWO Capital, you can go to PWL Capital.com. And there's a contact form on there. If you're interested in learning more about our services, you can use that contact form and you'll be contacted by someone who will talk to you and see if there's a fit. and if there's not, then they'll make some suggestions for where you should go. Okay, well, thanks a lot, Ben. Thanks for the invitation. It's great. The Canadian Investor Podcasts should not be construed

as investment or financial advice. The host and guest featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.