BMO Canadian ETF Dashboard

— as of September 30, 2019 —

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A Flightpath for Snowbirds: Covered Calls, Equities & Cash-Like Bonds

Alfred Lee

A Flightpath for Snowbirds: Covered Calls, Equities & Cash-Like Bonds

Snapshot
The current market uncertainty presents a tradeoff for Canadian “snowbirds”: How to meet their cash needs, while staying invested to prolong their capital in retirement? To this end, we see value in a strategy combining high dividend and low-volatility stocks, covered calls and a sleeve of ”cash-like” instruments. The uses include:

  • Maintaining disposable income. ZUS.U acts as a “cash-like” position by investing exclusively in investment grade U.S. corporate bonds with maturities of less than one year. By investing in ultra-short-term bonds, investors get a higher yield than cash, but also maintain cash-like liquidity.    
  • Achieving higher aggregate yields. A combination of high dividend stocks and ultra-short-term bonds offers higher returns than simply holding U.S. cash.  
  • Accumulating defensive growth. For investors concerned about where we are in the macro cycle, ZWH and ZLU provide equity exposure with additional income from writing covered calls.

Details
BMO Ultra Short-Term US Bond ETF (US Dollar Units) (Ticker: ZUS.U)
BMO Low Volatility US Equity ETF (US Dollar Units) (Ticker: ZLU.U)
BMO US High Dividend Covered Call ETF (US Dollar Units) (Ticker: ZWH.U)

Benefits
Cost efficiency. Disposable cash and conservative growth to offset the “burn-rate” in a retirement portfolio. 

Trade Idea – ZUS, ZLU, ZWH – All in US Dollars
As many of your clients head south for winter, there could be increased demand for solutions which provide liquidity and conservative long-term growth. After all, Canadians are living longer than ever before and the burn rate on their retirement savings should be a strong consideration when constructing a portfolio.

For disposable income, ZUS.U provides a conservative vehicle that offers a higher yield than cash, yet unlike a GIC, can be redeemed for cash at any time. By holding ultra-short-dated corporate bonds investor can get a higher yield than a T-Bill, but by holding only investment-grade bonds, capital preservation is also an emphasis.

As a growth complement, ZWH.U invests in high dividend U.S. companies and writes out-of-the-money call options to generate a 6% yield. Investors benefit from the dividend paying companies in the portfolio with the additional yield of call premiums. The addition of low-volatility stocks, also provides exposure to equities, while maintaining a more defensive exposure by investing in stocks that are less volatile than the market. A combination of these three ETFs is a simple way in meeting the objectives of snowbird client.

Outlook
Given the heightened uncertainty on trade, monetary policy, geopolitics, and a possible shift to the late cycle, it may be prudent to de-risk your clients’ investment portfolios while ensuring some participation in upside gains. 

Alfred Lee

A Flightpath for Snowbirds: Covered Calls, Equities & Cash-Like Bonds

Snapshot
The current market uncertainty presents a tradeoff for Canadian “snowbirds”: How to meet their cash needs, while staying invested to prolong their capital in retirement? To this end, we see value in a strategy combining high dividend and low-volatility stocks, covered calls and a sleeve of ”cash-like” instruments. The uses include:

  • Maintaining disposable income. ZUS.U acts as a “cash-like” position by investing exclusively in investment grade U.S. corporate bonds with maturities of less than one year. By investing in ultra-short-term bonds, investors get a higher yield than cash, but also maintain cash-like liquidity.    
  • Achieving higher aggregate yields. A combination of high dividend stocks and ultra-short-term bonds offers higher returns than simply holding U.S. cash.  
  • Accumulating defensive growth. For investors concerned about where we are in the macro cycle, ZWH and ZLU provide equity exposure with additional income from writing covered calls.

Details
BMO Ultra Short-Term US Bond ETF (US Dollar Units) (Ticker: ZUS.U)
BMO Low Volatility US Equity ETF (US Dollar Units) (Ticker: ZLU.U)
BMO US High Dividend Covered Call ETF (US Dollar Units) (Ticker: ZWH.U)

Benefits
Cost efficiency. Disposable cash and conservative growth to offset the “burn-rate” in a retirement portfolio. 

Trade Idea – ZUS, ZLU, ZWH – All in US Dollars
As many of your clients head south for winter, there could be increased demand for solutions which provide liquidity and conservative long-term growth. After all, Canadians are living longer than ever before and the burn rate on their retirement savings should be a strong consideration when constructing a portfolio.

For disposable income, ZUS.U provides a conservative vehicle that offers a higher yield than cash, yet unlike a GIC, can be redeemed for cash at any time. By holding ultra-short-dated corporate bonds investor can get a higher yield than a T-Bill, but by holding only investment-grade bonds, capital preservation is also an emphasis.

As a growth complement, ZWH.U invests in high dividend U.S. companies and writes out-of-the-money call options to generate a 6% yield. Investors benefit from the dividend paying companies in the portfolio with the additional yield of call premiums. The addition of low-volatility stocks, also provides exposure to equities, while maintaining a more defensive exposure by investing in stocks that are less volatile than the market. A combination of these three ETFs is a simple way in meeting the objectives of snowbird client.

Outlook
Given the heightened uncertainty on trade, monetary policy, geopolitics, and a possible shift to the late cycle, it may be prudent to de-risk your clients’ investment portfolios while ensuring some participation in upside gains.