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.
This BMO ZWC ETF review will cover an actively managed fund that will run your covered call strategy without you having to lift a finger.
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
- Provides hedging against downside risk using put options
- Comes with a higher Management Expense Ratio (MER)
- May underperform during extended bull market environments
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 dividend income securities while generating additional returns through call option premiums.
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 dynamically writes covered call options on the underlying securities using the option’s available premiums, offering you downside protection.
ZWC.TO is currently trading at close to $16.52.
ZWC Key Facts
As of October 17, 2023:
- Ticker Symbol: ZWC.TO
- Exchange: Toronto Stock Exchange
- Assets Under Management: $1,588.24 Million
- MER: 0.72%
- Annualized Distribution Yield: 8.20%
- Currency Traded: CAD
- Eligible Accounts: Most registered (TFSA, RRSP, etc) and non-registered available
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.
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.
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.
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.
BMO ZWC’s dividend yield as of October 17, 2023:
- Annualized Distribution Yield: 8.20%
- Dividend schedule: Monthly
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 by using dynamic call-writing options to help you earn more money through premiums.
Here is the performance of a hypothetical $10,000 invested in BMO ZWC since inception:
As of September 29, 2023:
|1 Year||2 Year||3 Year||5 Year||10 Year||Since Inception|
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.
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 ETF invests entirely in Canadian securities with no exposure to fixed-income securities:
BMO ZWC ETF Top Holdings
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 5.52% of its entire asset allocation, is the Canadian National Railway stock.
Its second-most significant holding is Enbridge Inc. at 5.24%, and Royal Bank of Canada is its third-most significant holding at 5.04%.
However, it is important to note that the fund invests in 99 securities as of As of October 17, 2023. 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.
|Weight (%)||Name||Bloomberg Ticker|
|4.86%||CANADIAN NATIONAL RAILWAY CO||CNR|
|4.78%||ROYAL BANK OF CANADA||RY|
|4.65%||BANK OF NOVA SCOTIA/THE||BNS|
|4.64%||CANADIAN IMPERIAL BANK OF COMMERCE||CM|
|4.47%||MANULIFE FINANCIAL CORP||MFC|
|4.40%||CANADIAN NATURAL RESOURCES LTD||CNQ|
|3.78%||BANK OF MONTREAL||BMO|
BMO ZWC Sector Diversification
The financial sector makes up the most significant part of ZWC, with almost 39.12% of its allocated to financial stocks. The second-most substantial exposure is towards the energy sector at 19.26%, and the communications sector comes in third at 9.47%.
BMO ZWC Risk Rating
BMO ZWC has a medium risk rating.
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.
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.
What are the risks of covered call ETFs?
One primary risk is the potential for opportunity cost. If the underlying securities appreciate significantly, the ETF might miss out on some of the gains because the stocks get “called away” when the options are exercised.
Additionally, covered call ETFs might underperform in extended bull markets since they cap the upside potential. There’s also the risk associated with the underlying assets themselves.
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 4.37% than BMO ZWC ETF’s 6.96%.
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 6.24% 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.
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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 passive income through call option writing, which almost always gets great 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.