Larry Berman CFA, CMT, CTABMO Covered Call Canadian Banks ETFZWB.TOHOLDDec 16, 2024

Likes the covered call overlay. You can't go wrong with Canadian banks, though don't put a lot of new money here given where we are in the economic cycle.

Great long-term exposure for Canadians in taxable accounts. Our banks have withstood so many business cycles over the years. From time to time, they will go down a lot; for example, during tariffs last year.

If we get close (and he thinks we are) to an economic environment in Canada where we're worried about recession and job growth, Canadian banks will underperform and go down more significantly than the broader market decline.

A way to play defense, and the covered call overlay adds another layer of defense via the extra yield. But to put new $$ in now after the run they've had? Absolutely not. But loves them for the long term.

Possibly, the day before the date quoted that the NAV closed a penny or two higher, so the ETF might have closed a little higher than it should have on the last trade. Sometimes a couple pennies here or there adds up to 10-20 basis points. Also, when a market declines, you short volatility on a covered call ETF, which erodes your NAV a little. Day to day, it's not a perfect tracking. Don't offer as much defence as structured ETFs.

You have to like the covered writing. Always remember that when you sell calls against your position, you're giving up some upside to get that return premium. Some of the "dividend" you're getting is actually a return of capital.

US banks are a lot bigger and a lot more robust. They'll probably do better than Canadian banks by a little bit. US banks are innovative and will be able to take advantage of opportunities in the crypto space. US banks are also involved in the global economy. 

But Canada has rocks, trees, oil, and gas -- part of how we develop over the next number of years. The spat with the US will be resolved because it's too important not to. We need to grow our GDP to support all our benefit programs, and natural resources are part of that.

Incorporating both is a wonderful way to go.

If the economy weakens, then banks are going to fall. If you had ZWB, you'd want to take $$ out of there and put it in ZWU. Doesn't mean ZWU won't go down (as it largely depends on what's driving market weakness), but it'll go down less. 

Have to make sure you understand what you get with call-writing on various indices. Compared to an equal weight, unwritten bank portfolio, in the type of market we've been in (trending upward), the total return for the covered call one is lower. You get income, but give up some of the upside. It's not good or bad, it's just a fact.

It does hedge to the downside, but not a lot. So if there's a large drawdown, you're going to feel most of that.

Why not put some in ZWB and, for the upside, some in an equal weight bank ETF with no call-writing?

Depends on your asset allocation, risk tolerance, and whether the GIC is in a registered account or not. He likes the BMO lineup for ETFs a lot. With lower interest rates and the thirst for data centres, thinks there's more to go in the utility space.

He himself writes covered calls on stocks. So he doesn't like ETFs that, as a mandate, have to write covered calls. It looks enticing, but the miracle of stocks is the growth you get from not selling calls or only selling them selectively as a tool.

Likes it. Did hold it for years, but sold last November on TD's money-laundering fine. He was concerned about contagion among the other banks that operate in the US. He'd be willing to go in again. Canadian banks should do fine, despite increasing provisions for credit losses.

These are covered call ETFs for banks, US (ZWK) or Canadian (ZWB). If tariffs and such are going to be negative for the economy, typically banks would underperform broader markets. He'd be cautious. Don't go out and sell right now, but be wary.

You'll probably get a better chance to buy in the next couple of months, when banks get a bit cheaper. In the meantime, ZST is a good place to park your cash.

They're popular, because people want the extra yield, but they work only in some environments. Better when you expects markets to go down for 6-12 months (a correction). In rapid declines, like Covid, you get only some protection. But in a strong market, you give you the upside and lag the market a lot. Just owning ZEB since 2011, you would have made 10.71% annualized; ZWB 8.34%. SO, use ZWB defensively at some point after a correction, say 10% or 15% down. Use ZEB in a strong rally. During strong declines, both ETFs fall roughly the same, but during the recent strong rally, ZEB was 16.98% and ZWB 14.85%.

Yield is 7.1%, fairly tax efficient from distributions and ROC. Great for investors that want that yield. However, more often than not, the underlying securities will perform better on a total return basis. With the covered call, you get struck out as prices go higher over time. See ZEB.

If you want exposure to financials and get growth in an up market. Is designed for income, but you don't get growth in the ETF price.

Reliable for income up until last fall and the TD fiasco; worried about contagion among Canadian banks. Now looking at this again. Not buying just yet, still looking at it. MER is 0.7%.

He doesn't see a hard recession coming, though any recession in Canada will be harder than in the US. In a hard recession, Canadian banks can easily fall 20-30%. A lot of the rally in recent months has been the recognition of aggressive rate cuts by the Bank of Canada. A lot of that's already in the market, and you have more downside risk than upside potential in terms of the next year or two.

That doesn't make it a bad ETF, but the question is what are you going to put your money in to generate the same kind of yield? He'd suggest considering a tilt more toward ZWU. This would give you diversification, plus let you keep your high-dividend yield with tax-friendly exposure for Canadian taxpayers.