BMO Ups Ante with New Covered Call ETF
As the number of Canadian’s entering retirement increases and the cost-of-living has skyrocketed, so has the need for many investors to generate additional cash-flow to pay monthly bills. Fortunately, BMO offers a well-timed solution, the BMO Global Enhanced Income Fund ETF Series (ZWQT).
This new fund provides both a sustained monthly cash flow and growth potential by bringing together a diverse group of covered call ETFs in to a professionally managed all-in-one solution.
A covered call is a contract between someone who owns an equity and a potential buyer. It provides the buyer an option to purchase shares of the stock at a set price for a limited period. In return, the issuer of a covered call is paid a premium. In the case of a covered call ETF, each of these premiums helps to increase the fund’s yield and enhance the income of investors.
While there are some investors who write covered calls on their own, many lack the expertise, capital and time to write options on the hundreds of stocks held within a covered call ETF. ZWQT, on the other hand, is a professionally managed solution that enables investors to benefit from a well-diversified portfolio of covered called ETFs through a single trade.
Covered call ETFs continue to be a popular investment vehicle after more than ten years of existence, but there are some who site their drawbacks, given that a covered call strategy could put a cap on the upside potential of a portfolio. According to Erin Allen, Vice President of Online Distribution at BMO ETFs, BMO recognized this concern and set out to remedy it. “At BMO, we use a number of levers in our strategy to strike a balance between generating cashflow and growth potential. One example is that we write covered calls on only 50% of the portfolio. So, names that we're not writing options on have full upside potential.”
This balanced strategy isn’t the only feature that distinguishes ZWQT from competitive products. The top holdings in the fund include the Global High Dividend Covered Call ETF, the US High Dividend Covered Call ETF, and the Canadian High Dividend Covered Call ETF – all BMO products. “Investors should really be aware of what we call double dipping of fees, ”Allen explains. “Many of our competitors don’t have in-house products and instead hold underlying ETFs from third party institutions. Investors could be paying fees on those funds in addition to an overall management fee. BMO’s approach is different because we have all the building blocks in-house, so we don’t need to double dip on fees. As a result, with ZWQT investors pay a relatively low management fee of 0.65%.”
Beyond the ease of this one ticket solution, ZWQT offers investors automatic quarterly rebalancing of the fund, which ensures the portfolio remains diverse as the value of underlying equities fluctuate. “Rebalancing is hard for investors to do on their own.” Allen said. “There's a lot of emotional decisions that come with rebalancing. People put it off, often because they want to see how far their winners can run. But at the end of the day, rebalancing is essential for a fund to stay on track and reach its stated goals.”
Quarterly rebalancing can also provide investors some significant cost savings by avoiding the commissions that they would otherwise be charged to directly buy and sell individual underlying ETFs. The opportunity to save is further enhanced as earned income from covered call options is taxed as capital gains at a more favourable rate.
The BMO Global Enhanced Income Fund ETF Series is based on a conservative covered call writing approach that investors can trust to provide a monthly cash flow of close to 7%*, delivered by an experienced team, who have assembled a long track record that has been battle tested through a variety of market cycles.
Over the past 12 years, BMO is number one in Canada in terms of net new flows into ETFs and has accumulated over $9 billion in assets in covered call ETFs, which translates into about 65% of the market share in Canada – further evidence that BMO is a leader when it comes to bringing new solutions to market to meet the needs of investors.
If you would like to learn more about the BMO Global Enhanced Income Fund ETF Series (ZWQT), contact your investment advisor or discount broker.
*Estimated Distribution Yield was calculated by using the May 31st, 2023 annualized distribution yields for the underlying ETFs. The distribution rate is based on the starting NAV of $15. Distribution yield is not an indicator of overall performance and will change based on market conditions, NAV fluctuations, and is not guaranteed Annualized Distribution Yield: The most recent regular distribution, or estimated distribution,(excluding additional year end distributions) annualized for frequency, divided by current NAV.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate. Certain of the products and services offered under the brand name, BMO Global Asset Management, are designed specifically for various categories of investors in Canada and may not be available to all investors. Products and services are only offered to investors in Canada in accordance with applicable laws and regulatory requirements.
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