ZWEN – Global Energy Exposure and Income in One Package

Snapshot

Oil prices have been very volatile in recent times, reaching as high as $123.70 a barrel in the summer of 2022 and recently dropping back to around $70.00. Despite the concerns around the slowing global economy and the potential impacts on demand, the supply side of the equation is now more constrained as well. This new shift provides a more balanced outlook for the energy sector. The BMO Covered Call Energy ETF (ticker: ZWEN) provides exposure to global energy companies, while delivering consistent income distribution through dividends and covered-call writing. 

Details

• BMO Covered Call Energy ETF (Ticker: ZWEN)

Benefits

• Exposure to a basket of global energy companies
• Covered call overlay implementation for income generation, writing short-dated out-of-the-money call options on approximately half of the portfolio
• Annualized Distribution Yield = 9%¹
• Distribution Frequency: Monthly
• Risk Rating: High
• Management Fee: 0.65%

Trade Idea

Looking ahead into 2023, there are a few factors that we need to consider:

• On the positive side, China’s reopening could lead to increased demand, as the country is a significant consumer of crude oil and there may be pent-up demand from the lockdown. The International Energy Agency (IEA) has forecasted Chinese demand growth at 800,000 barrels a day next year.² This is a positive sign for the crude oil market, especially because China’s demand growth has averaged around 600,000 to 700,000 barrels a day in the five years before COVID-19.
• Furthermore, we also need to keep an eye on the supply side of the market. We saw OPEC+ recently renew their supply agreement by slashing the production of crude oil.³ This surprise decision shifted the conversation from a bearish outlook to a more balanced outlook. This further shows OPEC’s commitment to defend oil prices and prevent them from falling out of bed completely. Additionally, the political situation in some of the major oil-producing countries is something that we need to be aware of. Given so many factors at play, the crude oil market is still volatile.
• On the other side, however, milder than expected weather in Europe is causing a decrease in demand and contributing to an increase in inventories. Additionally, China’s economy is becoming more service-driven, which may affect future demand, though, it is important to note that China’s economy is still heavily dependent on oil and gas, so the demand for crude oil will still be significant in the near term.

Outlook

Despite the concerns around recession and slowing global economy impacting the demand the crude oil, the supply side of the equation is now more constrained. This shift in narrative has resulted in a more balanced outlook for energy and energy companies; however, volatility will still be present. For clients interested in gaining exposure in a more risk-controlled manner, they can get this exposure through ZWEN. The ETF holds 20 names across different regions, and given the higher volatility in the equity markets, should be more accretive for the Fund, as it able to harness higher call option premiums.

¹ Annualized Distribution Yield: The most recent regular distribution, or expected distribution, (excluding additional year end distributions) annualized for frequency, divided by current NAV. Yield is as at, March 31, 2023. 

² ​“Chinese Oil Demand Seen Hitting Record on Covid Zero Pivot,” Bloomberg, January 12, 2023.

³ Maha El Dahan and Ahmed Rasheed, ​“OPEC+ announces surprise oil output cuts,” Reuters, April 2, 2023.