Opinions
John Hood
Horizons Enhan. Incm. Fin. ETF
HEF-T
TOP PICK
Oct 21, 2015
Stock price when the opinion was issued
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BMO Covered Call Cdn Banks (ZWB-T) or Horizons Enhanced Income Financials (HEF-T)? It is probably time to move from a Covered Call scenario where they yield 7%. If we do have a rising rate environment again, it is going to be a bit more of a “south of the border” scenario. If it is a North American phenomenon and we don’t hit the wall that everybody has been waiting for, then just being Long the Canadian banks, without having covered calls is the way to go. Thinks the US banks have a lot of upside.
Current yield is about 8.5%. This owns a basket of financial stocks and is basically writing Covered Calls against them. If the prospectus says they are writing options against most of the portfolio, i.e., 80% or more, he would have a problem with it because if he is correct, you get capped on the upside. Markets have been relatively choppy, so you could have the financials go up and come back. You are capped on the upside, it’s dropped down, and they are writing Calls below the strike price, and this could create some losses in the portfolio. He would prefer BMO Covered Call Canadian Banks (ZWB-T).
It is one of what he calls the covered call ETFs. It holds mostly Canadian banks. They sell covered call companies so that if the stocks appreciate quite rapidly then they sell out the equities for much less than the market value. It is not the same as a dividend income play. These kinds of ETFs outperform in range bound or downturn markets.
This sells Calls against the total portfolio. They are doing between 40% and 70% on covered calls. It is a much better product than it used to be. Dividend yield and capital gain of about 7.3%.