BMO Covered Call Utilities ETF (ZWU.TO)

Utilities, pipelines and Telco’s. 80/20 Canadian to US. It fell on anticipation of interest rate increases and oil dropping early in 2016. You have to be careful because rising interest rates and falling oil prices are both negative for it.

He doesn’t own any utility ETF’s right now. They are one of the most battered parts of the market, which would have been a great opportunity to buy around Christmas. This ETF is pretty good. It has a great yield. It has a combination of both Canadian and US utility names. This is a pretty good entry point. 6.75% yield.

Hold it in a TFSA if there is an interest rate increase? An interest rate increase is not necessarily a reason to bail on this, however, you need to recognize what you own. This would be utility stocks, and you need to have high dividend paying companies. This was a great space to be in prior to the US election, because of slow growth and interest rates pretty much on hold. Covered calls are written against half of the stocks, and the other half are allowed to grow by themselves. ZWB is probably a better place to be. It is the same structure, but a little less on the dividend side.

(Market Call Minute.) You are better to own the individual names, and do your own calls on top of it. However, it is an okay ETF to own.

Pipeline stocks with Democrats staying in power. This is a reference to keystone. Trump is in favour, Hillary is not. The valuation is not great right here. ZWU-T in this sector he likes. You are diversified and they are all high dividend payers and the ETF has a covered call overlay however if interest rates were going up then this would perform poorly. He would add to this ETF on weakness.

High-yield ETF’s? The Fed is probably off the table in terms of raising interest rates. It wouldn’t surprise him if the next move was a cut. If there is an economic downturn again, the answer is lower rates, but they are not going to work. There are some big challenges ahead. He has said for years that interest rates are going to stay near zero for decades, just for the world to get a little bit of growth. If interest rates are going to stay low, then utilities are a good source of dividends because they are regulated. There is not a lot of growth, but the dividends are pretty consistent and stable. He would stick with Canadian dividends. It is still a little too early to be aggressively buying things as there is more downside to come. His favourite is BMO Covered Call Utilities (ZWU-T). You are getting a near 7% yield.

This is a good holding. They are writing Call options against utilities that are inside the ETF. What you are really capturing here are option premiums, and he thinks they write on 40% of the underlying stocks. Generally, utilities are not a growth sector, but they pay a very good dividend and they are a defensive sector. If you are writing covered calls on that, you are increasing the dividend and capping the upside. Not a bad thing in an area that doesn’t have a lot of upside. An excellent strategy if you are inside a LIF. This is a strategy that you could dovetail with other things like a REIT.

The yield gives you part of your capital back. But also when trades create a need to distribute capital appreciation, you get some back.

ZWU-T vs. ZUT-T. ZUT-T is equal weight utilities in Canada. ZWU-T is 80% Canada and utilities also include pipelines and telcos and it has a covered call overlay. He prefers this because it is more diversified and has the covered call overlay.

(A trading vehicle or a Hold?) Feels ETF’s are more of a Hold than a Trade. This one has done quite well and has produced some pretty good yields. Compared to the rest of the market, it hasn’t done too badly. It has a Covered Call which essentially means that when you hold a portfolio of utilities, you also write Calls on them. The problem you might have is if we suddenly have a run on the utilities, which we are having right now. Your stocks then get called away causing you to miss the upside. He hasn’t been inclined to get into Covered Call ETF’s.

He loves this holding. It is very high yielding. You have some of the best and highest yielding companies and the covered call overlay adds to the yield. It is not a bond replacement, but fits into a lot of portfolios. It looks attractive for yield players out there.

Consists of good dividend paying companies with a covered call overlay. It is pushing an 8% yield. It has been a bad performer because pipelines have performed poorly. It is a diversified way to get income from Canada in a tax efficient way. There will be volatility. It is not a fixed income replacement.

This holds a basket of utilities mainly as well as some of the telecoms. It applies a covered call strategy to extract some additional income. His issue with the utility space is that if and when interest rates begin to move upwards, these dividend paying type of stocks will be under pressure to a certain extent. Telecoms have done quite well, but he is not a big fan of utilities.

He has looked at this Covered Call, but the problem is that it is utilities. It covers pipelines, telcos as well as some of the gas utilities. A bit too broad for him. You have a situation here where the telcos are going up and the pipelines are going down. As an investor he would rather pick his spots, i.e. invest directly in the pipelines or the telcos, rather than having them all mixed into one ETF.

The issue with utilities is always interest rates. He doesn’t see the rates going up significantly in the next little while, and this is a very nice overlay on top of the utilities, which are generally pretty sluggish. Likes the 5.5% yield on this.