Need Income and Growth? We’ve Got You Covered

Snapshot

Canadian retirees often have two conflicting needs within their long-term financial plan: bigger yields to fight persistently high inflation, and equity exposure for continued upside participation. BMO’s suite of Covered Call ETFs provides an elegant, low-fee solution to solve for both client goals.

Details

Benefit(s)

Higher yield – boost yield by collecting premiums on call option over-writing.
Lower costs – benefit from ETF-like fees and trading efficiencies.
Convenience – diverse exposure and call-writing all within one security.
Tax efficiency^*– option premiums taxed as capital gains rather than interest income.
Lower volatility – covered calls lower risks by layering on a bigger income overlay.

Win-Win: More income, better protection

Unique market conditions, like the kind witnessed so far in 2023, often cause clients to look for action from their Investment Advisors. Many are anxious about keeping their retirement plans on track regardless of inflation pressures, hawkish central banks, geopolitical tensions and a looming recession. As a result, investors are rightly seeking ways to maintain equity exposure, while protecting their portfolios against instability and broader economic concerns.

Enter Covered Calls ETFs — solutions that enhance income and also keep clients invested in equities. As a reminder of how they work, covered calls hold a security and simultaneously “write” (sell) a call option on that security. By trading off some upside participation, the portfolios receive a cash premium which provides additional cash flow compared to only owning the underlying holding.

Many covered call strategies exist across Canada. However, the devil lies in how the portfolio managers (PMs) manage the trade-off between income and growth. Our approach is to write out-of-the-money options on half of the assets and keep the remaining 50% uncovered as a pure equity position, which helps the portfolio appreciate when stocks are doing well. The result is moderate upside participation and high, consistent yield income. We choose to be transparent about our approach because, in some cases, clients may not understand what they are giving up to generate that yield.

Moreover, at BMO ETFs, we have a unique pedigree in covered calls. In 2011, our team launched Canada’s first ever covered call ETF with the BMO Covered Call Canadian Banks ETF (ticker: ZWB) and we have continued to build out the lineup across sectors and geographies. Whether it’s the High Dividend suite, or our Energy or Health Care ETFs, a strong Quality tilt within the underlying securities means we can employ a lighter touch and write further out-of-the-money call options to better allow for market appreciation. The result: yield you can trust for access to income and growth.

Outlook

As markets demonstrate sustained volatility through the first months of the year, it’s increasingly important for Advisors to provide clients with a defensive solution that keeps them invested. The message from the U.S. Federal Reserve, the Bank of Canada and other central banks is that inflation is expected to remain well above trend over the course of 2023 and into 2024, at least. The call option premiums generated by BMO’s Covered Call ETFs are a tax-efficient^*, low-cost means for clients to offset their erosion in real purchasing power, albeit with some trade-off in upside potential.

^* Tax Efficiency: As compared to an investment that generates an equivalent amount of interest income.

Disclosures

Distributions are not guaranteed and may fluctuate. Distribution rates may change without notice (up or down) depending on market conditions. The payment of distributions should not be confused with an investment fund’s performance, rate of return or yield. If distributions paid by an investment fund are greater than the performance of the fund, your original investment will shrink. Distributions paid as a result of capital gains realized by an investment fund, and income and dividends earned by an investment fund, are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, you will have to pay capital gains tax on the amount below zero. Please refer to the distribution policy for BMO ETF set out in the prospectus.

Cash distributions, if any, on units of a BMO ETF (other than accumulating units or units subject to a distribution reinvestment plan) are expected to be paid primarily out of dividends or distributions, and other income or gains, received by the BMO ETF less the expenses of the BMO ETF, but may also consist of non-taxable amounts including returns of capital, which may be paid in the manager’s sole discretion. To the extent that the expenses of a BMO ETF exceed the income generated by such BMO ETF in any given month, quarter or year, as the case may be, it is not expected that a monthly, quarterly, or annual distribution will be paid. Distributions, if any, in respect of the accumulating units of BMO Short Corporate Bond Index ETF, BMO Short Federal Bond Index ETF, BMO Short Provincial Bond Index ETF, BMO Ultra Short-Term Bond ETF and BMO Ultra Short-Term US Bond ETF will be automatically reinvested in additional accumulating units of the applicable BMO ETF. Following each distribution, the number of accumulating units of the applicable BMO ETF will be immediately consolidated so that the number of outstanding accumulating units of the applicable BMO ETF will be the same as the number of outstanding accumulating units before the distribution. Non-resident unitholders may have the number of securities reduced due to withholding tax. Certain BMO ETFs have adopted a distribution reinvestment plan, which provides that a unitholder may elect to automatically reinvest all cash distributions paid on units held by that unitholder in additional units of the applicable BMO ETF in accordance with the terms of the distribution reinvestment plan. For further information, see Distribution Policy in the BMO ETFs’ prospectus.

Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus of the BMO ETFs before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Exchange traded funds are not guaranteed, their values change frequently, and past performance may not be repeated.

For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the BMO ETF’s prospectus. BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

BMO ETFs are managed by BMO Asset Management Inc., which is an investment fund manager and a portfolio manager, and a separate legal entity from Bank of Montreal.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.

^®/™Registered trademarks/trademark of Bank of Montreal, used under licence.