BMO Covered Call Utilities ETF (ZWU.TO)

This is a very interest rate sensitive ETF, holding pipelines, telcos and utilities. As these are very capital intensive entities with high borrowing needs they get hurt with rising interest rates. He doesn’t think interest rates will be going much higher and he will be buying more on if prices get lower, because he likes the yield and sees it as a good diversifier in his portfolio.

It is in all the portfolios he manages. It is pipelines, utilities and telcos. It is 70% Canadian / 30% US. They write covered calls to enhance yield to 6-6.5%. Because of all the yields carrying a lot of debt on their balance sheets it is very interest rate sensitive. You get a bit of a shock as they start to raise interest rates. It will stay in a trading range of $13 to $14.25 for some time. He has been nibbling for some time.

It is a great holding for Canadians to get telcos and pipelines. 30% is in US utilities. The CAD$ has rallied 2-3% and utilities in the US have been getting beaten up. That caused the last swing down in the price. This should stabilize if there is a dovish rate hike in Canada this week. After Wednesday’s BOC meeting it would be a good time to buy if they do a ‘raise and done for a year.’

In a covered call strategy there are two factors for the distribution: Distribution of equities the ETF holds and premiums from the covered calls. There were no cuts in the stocks’ dividends but volatility shrunk so much this year that the premium from the covered call overlay is coming down and that is what brought the ETF’s distribution down. Don’t worry about it. We will see volatility pick up in the future.

A basket of Canadian utility companies, so the dividends are good, and you have Covered Calls against them. Premiums on utilities, typically are not very high, which tends to deflate the potential capital gains you would get from the option premiums. He would prefer ZWB-T because he likes the banking sector going into next year.

A Covered Call ETF. This is a mixed bag of traditional utilities and pipeline utilities. A steady type of name and you are going to get extra yield from the covered call writing. An interesting name. It probably won’t give you the growth he is looking for in his portfolios. If you are in an area where markets are moving higher, you want to be in the underlying securities, not a covered call strategy.

He loves ZWB-T and it is a great way to hold the banks. But he sold out, taking profits, putting it into ZWU-T. This is a lot more interest rate sensitive. ZWU-T will outperform in a market correction as utilities are more defensive.

Good for a TFSA?This ETF holds a range of utilities and pays an excellent return. Essentially you are buying a portfolio of Canadian utilities. If you want a nice cash flow in your portfolio, it gives you diversification.

The .U units are in US$ and not a lot of people are using them. Its liquidity is that of the underlying securities. The market maker creates more units as required. There is no need to worry about liquidity just because the ETF is thinly traded.

There are 20 securities in this with roughly 5% in each. Is 10%-15% of that too much to have in one Security? This pays a very nice yield. Originally it was just Canadian utilities, but now they have some US stuff as well. Utilities are very subject to interest rate changes, and is something to keep in mind. He doesn’t know about going with 15%, but you are probably fine with 5%-10%. With a possible increase in interest rates, you might want to wait a few days.

He likes it and holds it in a dividend fund, using it in a defensive way. It has a covered call overlay. Unfortunately the premium from the covered call strategy is less than desirable because volatility has been so low for so long. We are seeing a little sell off because of a sensitivity to interest rates. If it falls another couple of percent he will go back to accumulating it.

A Covered call ETF which clients gravitate to. ZUT-T is the non-covered call overlay. Over the very long haul you may get higher returns with ZUT-T than ZWU-T. If you need the yield, then there is nothing wrong with the covered call ETF, ZWU-T. Consider XIC-T also.

80% Canada / 20% US. It is not a fixed income replacement. He is not adding to his holding right now. He loves it as a yield play and would add more if we sold off more aggressively. He has half a position.

Had been avoiding the utility area, because he saw the temper tantrum the market went through with the thought that rates were going up in the US. He’s come to the conclusion that interest rates are going to stay low for a lot longer than anticipated. Utility yields are quite attractive, and it is almost impossible to get those kinds of yields out of the fixed income market.

He would be very cautious about certain ETF’s that are loaded with derivatives, etc. They may not perform the way you expect them to. Also, the market doesn’t just look at where rates are going in the next year. He would not be a big fan of a Covered Call ETF.