Exchange-Traded Funds (ETFs) are becoming a popular investment vehicle for all kinds of Canadian investors.
Whether you are a beginner learning how to invest in Canada or a seasoned investor who does not have the time to find individual stocks and managing your portfolio, Canada offers several ETFs to meet a wide range of financial goals.
Covered call investing is a semi-popular strategy that you can use to get higher returns on securities. It can get a bit tricky though.
Instead of using a covered call strategy on individual stocks, you can invest in covered call ETFs to benefit from covered calls without directly participating in the options market.
If you are looking for a covered call ETF that provides you with a substantial monthly income, my BMO ZWC ETF review will cover an actively managed fund that you can consider using for this purpose.
Invest In Canadian Covered Call ETFs
Invest in an actively managed ETF to gain exposure to high-dividend yield paying Canadian stocks with enhanced yields through writing covered call options.
- Increased income
- Reduced capital risk
- Generally performs better than the market in most situations
- Provides hedging against downside risk using put options
- Comes with a higher Management Expense Ratio (MER)
- May underperform during extended bull market environments
Table of Contents
What Is BMO ZWC ETF?
BMO Canadian High Dividend Covered Call ETF (ZWC) is an actively managed ETF designed to provide you with exposure to a portfolio of securities focused on helping you earn dividend income while generating more returns through call option premiums.
The covered call ETF’s underlying portfolio is yield-weighted and diversified across different sectors of the economy,
The fund uses a rules-based methodology that factors in the dividend growth rate, yield, and payout ratio to add securities to the portfolio. The fund managers also subject the individual securities to a liquidity screening process to determine whether the assets align with the fund’s objectives.
The ETF also dynamically writes covered call options on the underlying securities using the option’s available premiums, offering you downside protection.
How Do Covered Call ETFs Work?
A covered call ETF is an actively managed fund that purchases a set of stocks and dynamically writes call options on them. The fund manager engages in the call-writing process to maximize the potential returns for investors.
As an investor utilizing covered call ETFs, you can benefit from covered call investing without directly having to participate in the options market yourself because the fund manager handles all of it for you.
Covered calls involve purchasing shares of a stick and writing call options contracts on them. Other investors can then buy the call option contract from the call option writer. They pay the call writer a premium fee to purchase the options contract.
The contract gives the option holder the right to purchase the shares of the security at a specific price (strike price) on or before a predetermined date.
When the share price of the security rises above the strike price, the option holder could exercise their right to purchase the security. If they choose to do that, the call option writer has to sell the security to the option holder.
The option holder benefits from this because they can purchase the share at a lower cost than its current market value.The option holder’s profits will equal the difference between the strike price and its current trading price minus the premium paid.
The greater the share price above the strike price, the more substantial the profit for the call option holder when exercising their call option.
Call option writers receive a premium when investors purchase call option contracts from them. Ideally, the option writer benefits the most when the price of the security remains flat, falls, or rises slightly. If the security’s price rises above the strike price, they still get the premium, but the security is called away.
If the underlying security does not appreciate to the strike price, the call option writer will hold onto the shares and the premium they received from option holders.
What Does BMO ZWC ETF Invest In?
BMO ZWC ETF diversifies its funds across various sectors of the Canadian economy, providing investors with exposure to the performance of various high dividend yield equity securities.
BMO Global Asset Management professionally manages the fund, and it is designed to provide investors with higher income from equity security portfolios.
It means that the fund does not invest any money in fixed-income assets like bonds or GICs. It allocates 100% of its capital to equity securities that can offer decent dividend income.
Unlike many other ETFs, BMO ZWC ETF does not track the performance of a certain segment of the market or any specified market index.
The fund manager rebalances the portfolio twice a year based on the dividend growth rate, yield, and payout ratio of the underlying securities to continue providing unitholders with high dividend income and using call option writing to maximize the payouts they can receive.
BMO ZWC Asset Allocation
Typically, this section of my BMO ZWC ETF review would discuss the asset allocation split between the fixed-income securities and equity securities held by the fund. However, BMO ZWC ETF invests entirely in Canadian securities with no exposure to fixed-income securities.
Since BMO ZWC ETF invests entirely in equity securities, investing in the fund entails a greater degree of capital risk than investing in a fund that allocates a portion of its capital to fixed-income assets.
Call option writing mitigates some of the risk involved with a pure-play equity securities portfolio, making it a relatively safer all-equity-security asset for your portfolio.
BMO ZWC Sector Diversification
This section of my BMO ZWC ETF review will cover the diversification of the fund’s capital across different sectors of the Canadian economy.
The fund does not invest in securities trading in any international stock market. It means that the fund offers you exposure to only Canadian equity securities that provide high dividend yields.
The financial sector makes up the most significant part of the fund, with almost 40% of its allocated to financial stocks. The second-most substantial exposure is towards the energy sector at 13.53%, and the telecommunications sector comes in third at 13.13%.
BMO ZWC ETF Top Holdings
This section of my BMO ZWC ETF will cover the top holdings for the ETF.
BMO ZWC ETF offers you broadly diversified exposure to Canadian equity securities in different sectors of the economy. The fund’s top holding, which accounts for 5.38% of its entire asset allocation, is the Canadian National Railway stock.
Its second-most significant holding is Enbridge Inc. at 5.17%, and BCE Inc. is its third-most significant holding at 5.00%.
However, it is important to note that the fund invests in 91 securities as of September 24, 2021. All its top ten holdings offer similar weightings in the portfolio, with nominal differences in how much BMO ZWC ETF allocates its funds between the top ten holdings.
BMO ZWC MER And Fees
BMO ZWC is an actively managed ETF, and that means that the management fees and overall expenses through the MER are more expensive than passively-managed funds that track the performance of market indexes.
BMO ZWC ETF has a management fee of 0.65%, and its MER is 0.72%, making it pricier than many low-cost ETFs on the stock market.
However, owning the ETF is still less expensive than any mutual fund product with similar benefits and features. Traditionally, mutual funds in Canada charge a significant annual fee of 2% or more.
A covered call ETF like BMO ZWC offers better value for money than mutual funds due to its lower fees, making ETFs increasingly popular among Canadian investors than mutual funds.
BMO ZWC Performance And Returns
BMO ZWC provides you with exposure to the performance of the best dividend-paying equity securities trading in the Canadian stock markets.
The fund began trading on the stock market in 2017, and that means that there is no long-term performance that I can reference to help you understand whether it could be a worthwhile long-term investment.
However, it is possible to view its performance in the three years since its inception. The fund has mostly enjoyed a sideways movement, making it ideal for investors seeking returns through passive income.
The dip in the stock market in February and March 2020 led to the fund’s valuation declining with the broader market, but it has managed to recover and move past its previous all-time high.
The lack of exposure to securities trading in other countries or fixed-income assets makes BMO ZWC a relatively risky investment to consider.
However, the broader recovery in the stock market since the dip has not been adequately reflected in the returns provided by BMO ZWC because call option ETFs tend to underperform the broader market during extended bull periods.
BMO ZWC Dividend Yield
High dividend yields are the primary reason many investors might want to consider investing in BMO ZWC ETF. The fund provides you with monthly payouts at an annualized dividend yield of 6.49% by using dynamic call writing options to help you earn more money through premiums.
BMO ZWC is an expensive fund because it charges an MER of 0.72%, but its juicier dividend yield could offset the fees and overall expenses you have to pay for being a unitholder.
Are Covered Call ETFs Good?
Covered call ETFs are a tricky proposition for investors to consider, and they might not be ideal for everyone. A good time to buy a covered call ETF could be when you expect most of the securities held by the fund to trade sideways or to decline slightly for a while.
If you are an investor who is not interested in substantial returns through capital gains and want to gain extra income in your portfolio, a call option ETF like BMO ZWC could provide you with the income you need. However, you should know that you might miss out on stellar returns during bull market conditions.
Retirees might find call option ETFs more appealing because it lets them add more income to their portfolios without having to learn about options trading.
BMO ZWC Alternatives
This section of my BMO ZWC ETF review will cover a few alternative financial instruments that you can compare the ETF with.
BMO ZWC ETF Vs. BMO ZWB
BMO ZWB ETF is another covered call ETF. The fund provides you with exposure to the Canadian banking sector with the additional benefit of earning through call option premiums. Much like with BMO ZWC, the fund manager dynamically writes covered call options for the underlying securities held by BMO ZWB.
The fund could be a viable alternative to BMO ZWC if you are looking for a call option ETF that focuses on the Canadian banking sector. BMO ZWB comes with similar management fees and expenses but provides you with a narrow exposure to Canadian banking equity securities.
BMO ZWC ETF Vs. BMO ZEB
BMO ZEB ETF is not a covered call ETF like BMO ZWC or BMO ZWB. The fund can effectively be considered a non-call option version of BMO ZWB. BMO ZEB is a passively managed fund that tracks the performance of the Solactive Equal Weight Canadian Banks Index.
The fund allocates an equal weight to each of its constituent securities based on their market capitalization.
Since it is a passively managed fund that tracks the performance of a market index, BMO ZEB comes at a lower cost. The fund’s management fee is 0.25% and an MER of 0.28%. However, its annualized distribution yield is significantly lower at 3.30% than BMO ZWC ETF’s 6.49%.
BMO ZWC ETF Vs. BMO ZWT
BMO ZWT is another covered call ETF offered by BMO Global Asset Management. The fund provides you with exposure to a basket of equity securities trading in the tech sector in North America and lets you earn through call option premiums to maximize your returns.
The fund offers an annualized dividend yield of 4.41% but comes with an MER of 0.73%, making it more expensive than BMO ZWC.
Additionally, BMO ZWT’s focus on the tech sector might not provide you with similar returns to investing in the individual securities held by the fund even without call option writing. BMO ZWC could be a better way to invest in a covered call ETF to get higher returns.
How To Buy BMO ZWC ETF In Canada
You can purchase BMO ZWC ETF in Canada through most Canadian brokerage platforms that offer stock and ETF trading. My top choices are Wealthsimple Trade and Questrade.
| Image | Product Title | Features | Price |
|---|---|---|---|
Editor's Choice  | Wealthsimple Trade |
| Get $50 Signup Bonus |
Reliable Pick  | Questrade |
| Get $50 Free Stock Trades |
To learn more, check out my full breakdown of the best trading platforms in Canada here.
Our Final Verdict: Is ZWC A Good Buy?
BMO ZWC is a tricky proposition to consider adding to your portfolio. Covered call ETFs provide you with more passive income through call option writing virtually guaranteeing better yields.
However, the overall returns from these funds may be significantly lower than what you might get from their regular counterparts or even by writing call options on individual stocks yourself.
The ETF does provide you with more monthly income despite the higher annual fees and lower overall income. If you do not mind the high management fees and MER eating into your profits and want to get a better monthly payout from your investment, BMO ZWC ETF could be a good buy.
If you want to earn monthly dividends with hands-off investing through ETFs, I suggest checking out my list of the best monthly dividend ETFs in Canada to explore more options.
