BMO Canadian ETF Dashboard

— as of June 30, 2019 —

Thank you for printing our content at https://www.bmoetfs.ca/en/trade-tips/.

Open in full screen
Chris Heakes

O Canada, Covered Calls Stand on Guard for Thee

Snapshot

With Canada outperforming all developed countries in 2019, ZWC offers an innovative approach to enhance your clients’ portfolio yield. Adding this exposure can help to navigate volatile market environments, mitigate risks, and lever tax efficiencies for high-quality dividends and options premia. 

Chris Heakes

O Canada, Covered Calls Stand on Guard for Thee

Snapshot
Canada has outperformed all other developed markets in 2019. Investors can leverage these domestic returns, while keeping an eye to uncertainty and volatility, by using a covered call strategy with a focus on dividends. The uses include:

  • Enhanced yield. ZWC yields 6.9% through a combination of dividend-oriented holdings, and collecting additional option premiums.
  • Low volatility. Dividend growers have a proven track record of outperforming the broader market while maintaining lower volatility.
  • Tax efficiency. Dividends from the underlying holdings benefit from the dividend tax credit, and options premiums are subject to capital gains treatment.

Details
BMO Canadian High Dividend Covered Call ETF (Ticker: ZWC)

Benefits
Greater income through diversified portfolio of high-dividend Canadian companies. Reduced volatility through call option writing.

Trade Idea – Domestic Dividends with an Options Layer
At the official start of summer, the sun is shining on Canada. Not only is unemployment rate down to 5.4%– its lowest level in over 40 years – but a relatively stable housing market and supportive oil prices are positive indicators of the broader macro environment. Western Canadian Select Crude is up 50% this year, and valuations look attractive: Canada’s forward P/E is 15.2, versus 17.9 in the U.S1.

Year-to-Date Performance: Canada vs. The World

Heakes-June-2019-Graph.png#asset:2958

Source: Bloomberg, December 31, 2018 – June 24, 2019 

Geopolitical tensions, such the ongoing U.S.-China trade war, also support the idea of a portfolio tilt toward domestic assets. To this end, ZWC provides investors with a high-quality Canadian names, enhanced yield, lower volatility and a tax-efficient structure – levering dividend tax credits for underlying securities and capital gains treatment for options premiums. (ZWC was also featured in BMO Global Asset Management’s recent report, “5 BMO ETFs Yielding > 5%.” Click here to read more.) 

The underlying holdings are screened for a history of dividend growth and sustainability of payout, with an added focus on option liquidity. As the chart below demonstrates, companies that regularly increase their dividend payouts are proven to deliver better annualized returns over the long run. And what’s more, they do so with lower volatility. Adding to these benefits, writing call options on approximately 50% of the portfolio allows us to accumulate incremental returns from premiums, the net result being a fund that captures a majority of the market’s gains while also adding a buffer against downside losses.   

bmo-etfs_04dashboardchrisheakeschart848px_2019-07-06_ENG.jpg#asset:3008

Outlook 

ZWC benefits from strengthening fundamentals in Canada, and offers a tax-efficient enhanced income stream, with a distribution yield of 6.9%. Investing in a dividend-oriented approach is a proven strategy in Canada, and ZWC is an ideal tool to implement this approach. 

Fund Name Ticker YTD 1 Year 2 Year Since Inception
BMO Canadian High Dividend Covered Call ETF ZWC 13.04% 3.45% 4.29% 4.23%

Source: BMO Global Asset Management, as of June 30, 2019. Inception date, Feb 3, 2017.

 

 

 

1 Statistics Canada, Labour Force Survey, May 2019.

Open in full screen
Keith Richards

Metals for a Good Time, Not a Long Time

Snapshot

The combination of a potential economic slowdown in the U.S. and a strong US dollar has beaten the base metals sector to extreme levels. The sector looks ripe for a contrarian oversold rally. Investors should consider adding direct commodities exposure or a mining/producer ETF, such as ZMT.     

Keith Richards

Metals for a Good Time, Not a Long Time

Snapshot
The combination of a potential economic slowdown in the U.S. and a strong US dollar has beaten the base metals sector to extreme levels. The sector looks ripe for a contrarian oversold rally. As such, investors can add a metals component to their portfolios through direct commodities exposure or a mining/producer ETF, such as ZMT.

Details
BMO Equal Weight Global Base Metals Hedged to CAD Index ETF (Ticker: ZMT)

Benefits
Short-term returns. Hedge against broad market underperformance.

Trade Idea – Buy the Dip
Excessive pessimism on the macro side has driven commodities and miners/producers to unsustainable levels. You can buy into the base metals sector via two types of ETFs: base metals mining/producers, such as ZMT, and direct commodity exposure, such as Invesco DB Based Metals Fund (Ticker: DBB). You can also pick up leading metals within the Index, such as copper or individual names within the sector.

At ValueTrend, we have been long ZMT for several weeks, given that it looks to have bounced off of support at $40. Oversold securities tend to bounce off of support – creating an ideal opportunity for those who appreciate a contrarian short-term play. Investors should remember this is a relatively short-term trade, not a long-term investment. As such, we anticipate a sell point for ZMT as it reaches or goes over $46 per share. We look for $48 as the upper limit of our sell target.

Obviously, this is not a trade that would appeal to conservative investors. Risk of support not holding onto both of these positions is present. With that in mind, a tight stop loss strategy should be in place, if support is broken by more than a few days. 

Keith-Richards-July-2019-Graph.png#asset:2938
Source: stockcharts.com

Outlook
For ZMT, the safest side of the trade is under $48. I am not implying that ZMT cannot go higher. If the strong economy holds up and China trade concerns are resolved, there is room for the rally to extend beyond our target. However, this particular trade is quick and dirty. We bought ZMT a few months ago, sold at $46.50, bought it back at $41 – now we are looking to sell it after another 5% to 8% gain.  

Open in full screen
Russ Visch

Golden opportunity to gain exposure to gold

Snapshot

Gold prices broke out of a massive multi-year base recently, driven by persistently low interest rates and a slowdown in global growth. Given the pattern of the breakout and the direction of macro trends, ZGD and ZJG may be at the start of a new long-term uptrend.

Russ Visch

Golden opportunity to gain exposure to gold

Macro Update

  • On June 25, gold rallied to a 6-year high of $1,423.44 (USD) an ounce in the spot market.
  • Low interest rates and slowing global growth have buoyed gold to multi-year highs.

Bottom-Up Impact

  • Centerra Gold is up 63.65% YTD and Eldorado Gold has rallied 87% YTD.
  • M&A activity in the sector will continue to build as the price of gold ticks upward. Barrick Gold acquired Randgold and Newmont acquired Goldcorp earlier this year.

The Technical Analysis
Gold broke out of a massive multi-year base recently. The close above $1,375 signalled the beginning of a new long-term uptrend and opened an initial upside target that measures to $1,705. However, given the size of the pattern it broke out of, it’s possible that gold equities may go significantly higher than that. The net result was a major breakout in the S&P/TSX Gold Index, representing Canadian gold equities, as well. The close above resistance at 1535 signalled the beginning of a new long-term uptrend with an initial upside target that measures to 1955 – 15% higher than current levels. Like the chart of gold itself though, this is likely just the first stop on what could turn out to be a multi-month uptrend.

bmo-gam_01technicalanalysischart848px_2019-07-02_ENG.jpg#asset:2943

Implementation
For exposure to gold equities, consider buying the BMO Equal Weight Global Gold Index ETF, (ticker: ZGD).

bmo-gam_02zgdchart848px_2019-07-02_ENG.jpg#asset:2945

For exposure to junior gold companies, consider buying the BMO Junior Gold Index ETF, (ticker: ZJG).

bmo-gam_03zjgchart848px_2019-07-02_ENG.jpg#asset:2949