Opinions
John Hood
BMO Covered Call Canadian Banks ETF
ZWB-T
BUY
Jun 13, 2025
Stock price when the opinion was issued
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That's a very specific question about one investor and their financial circumstances, risk tolerance, etc.
If we're going into an environment of slower economic conditions, then ZWU is likely to do a bit better. This would be due to the Canadian banks pulling back. He loves them both, great exposures. A bit concerning if all a retiree's portfolio is in just those two vehicles; there's not much diversification either within or outside of Canada.
Consider adding ZPAY, which gives you some US exposure to big banks and tech, and with a lower risk profile.
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.
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%.
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.
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.
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?
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.