Opinions
Larry Berman CFA, CMT, CTA
BMO Covered Call Utilities ETF
ZWU-T
PARTIAL SELL
Sep 23, 2024
Stock price when the opinion was issued
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This is an accounting item. There are 2 types of ROC, 1 good and 1 bad. The bad one is where the ETF provider is goosing up the return to be seen to be giving you more of a yield, but they end of giving you some of your own money back. That's not good. BMO doesn't do that.
To find out which one it is, you can call the ETF provider. Here's another way. Look at the underlying holdings. For example, assume they pay a dividend of 4%, there's an MER for the fund, and the option overlay generates a return of 2-3% a year. If you're being paid 6-7%, it's all good and you're getting it all. But if you're being paid 6%, but none of the underlying holdings pay 6% and there's no covered call overlay, then you're getting some of your own money back
He used to manage this. Even during the April meltdown, this didn't fall as far as the market. There is still risk here, but the extra income through covered calls helps. Is defensive without huge returns, but you need some defence in a portfolio. If the market falls 30%, ZWU would fall 15%.
He always advocates diversifying a portfolio. You don't want to have too much in one name. Ever. He doesn't know the percentage of the investor's portfolio. If BCE is only 1% of the portfolio and with BCE being relatively cheap, he'd stick with it. But if BCE is a huge part of the portfolio, then diversifying that risk away would make sense.
Here's the challenge: what's in XDV? Banks, lifecos, energy names. Has done well in recent years, whereas BCE has underperformed dramatically.
For more diversification, he'd look at ZWU -- gives you some telcos and utilities plus a covered call. Still some exposure to BCE, but diversified within the utilities space and given you an enhanced yield. Nice, tax-efficient yield north of 7%. And you don't have the current extremes of the banks and lifecos of XDV.
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.
Going all in on any one sector is a bit extreme. If we get into higher-than-expected inflation, utilities will struggle. Defensive tilt, and sells calls to enhance income. Low volatility sector means call-writing premium also lower. Fine choice for part of a diversified portfolio.
Utilities, pipelines, and telcos (including BCE). A utility play, with a covered call strategy. Really nice way to get a lot of income in your portfolio without a lot of volatility. But very interest-rate sensitive. Lots of ups and downs over the last 5 years, mainly based on what the bond market's done.
ZWP is the equivalent of high-dividend players, but exposed to Europe. Some of the best dividend yields come out of foreign companies. Great way for Canadian investors to get income and dividend exposure in Europe. Likes it very much.
Likes both, and owns both in his ZZZD. The mix changes from time to time as he sees more value in one or the other. Most recently, he trimmed ZWU and bought some ZWEN (direct exposure to covered call energy sector).