BMO Canadian ETF Dashboard

— as of January 31, 2020 —

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An ETF Hat Trick: 6.5% Income1, Global Growth and ESG Screening with ZWG

Chris Heakes

An ETF Hat Trick: 6.5% Income1, Global Growth and ESG Screening with ZWG

Snapshot
As we usher in a new decade, the current economic cycle is extending, driven by low rates globally – setting up demand for global growth exposure. Investment into blue-chip, large-cap, high-dividend, and multi-national stocks, such as Microsoft, Coca-Cola, and Johnson & Johnson, is an excellent way to participate in this growth, and the covered call overlay will add necessary tax-efficient yield to client portfolios.

As a concentrated portfolio of 50 holdings, this solution also looks to mitigate tail risk by factoring in environmental, social and governance (ESG) considerations.

We see value in an all-in-one ETF solution that provides growth, enhanced income, and Responsible Investing (RI) to serve the needs (and wants) of both the current – and next – generations.

Details
BMO Global High Dividend Covered Call ETF (Ticker: ZWG)

Benefits

  • Higher yield – 6.5%2: a combination of high dividends and covered calls
  • Lower volatility – ESG integration can mitigate stock specific risk and call option writing helps to reduce volatility
  • Stable, tax-efficient income – Global stocks that are quality dividend growers with a proven covered call strategy to generate additional tax-efficient income
  • ESG integration and active ownership – Focus on  sustainable business practices to meet long-term objectives, combined with BMO’s active ownership of stocks to boldly grow the good

Trade Idea

ZWG offers broad diversification suitable for your clients’ core equity exposure, across both markets and sectors. Its selection process inherently tilts the portfolio toward higher-quality names – from both a dividend-growing and ESG perspective, resulting in steady, tax-efficient income. And the BMO Global Asset Management covered call overlay method provides incremental yield, with premiums collected. The incorporation of ESG factors helps to reduce stock-specific risk, and the premiums collected act as a buffer against price declines, thereby reducing volatility. Risk mitigation is an important trait in the current environment with potential macro-headwinds and political uncertainty on the horizon.

Case in point: its yield for the underlying portfolio is 3.8%3, while the covered call mandate targets a supplemental 3%-4% in additional tax-efficient income. Offering this higher level of yield, ZWG represents a practical tool Advisors can offer to further diversify portfolios and participate in growth, for improved, and more balanced, overall construction.

ZWG also has exposure to attractive ex-U.S. valuations, which is especially appealing with many clients concerned about overvalued U.S. equity markets in the current late-cycle. Its forward-looking price-to-earnings ratio is 14.5, versus 16.8 for the MSCI World Index, while the return on equity is 19.2% versus 16.6%, providing supportive fundamentals for the strategy.

ZWG-Holdings-EN.JPG#asset:3725

Source: BMO Global Asset Management, as of January 31, 2020.

Diversification Across Sectors AND Geographies:

ZWG MSCI World Index
Dividend Yield 3.8% 2.7%
Target Option Yield 3%-4% 0%
Forward Price/Earnings Ratio 14.5 16.8
Return on Equity 19.2% 16.6%
Forward Price/Earnings-to-Growth 3.3 2.7

Source: Bloomberg, as of January 31, 2020.

Lastly, ESG considerations are a fundamental part of the portfolio construction process, which is a positive driver for the vehicle going forward, particularly as demand for RI becomes more mainstream among investors across generations. ZWG leverages the proprietary research of our Responsible Engagement Overlay (reo ®) team in the UK, a service designed to identify, actively manage and report on ESG risks in institutional client portfolios.

Outlook
Global growth is turning a corner, which means further room for upside with respect to risk assets, especially outside the U.S. Implementing a strategy that adds exposure to a global high-dividend-focused portfolio – while earning call option premiums – allows clients to stay invested and access diversified, long-term capital growth, while also remaining defensive through the extra income boost. Given the current macro backdrop, we expect demand from clients will continue to flourish for solutions that provide the best of both worlds – and all through an ESG lens to achieve their longest-term objectives.

 

 

1 BMO Global Asset Management.

2Ibid.

3 Bloomberg, yield as of January 31, 2020.

4 Bloomberg, as of January 31, 2020. 

Chris Heakes

An ETF Hat Trick: 6.5% Income1, Global Growth and ESG Screening with ZWG

Snapshot
As we usher in a new decade, the current economic cycle is extending, driven by low rates globally – setting up demand for global growth exposure. Investment into blue-chip, large-cap, high-dividend, and multi-national stocks, such as Microsoft, Coca-Cola, and Johnson & Johnson, is an excellent way to participate in this growth, and the covered call overlay will add necessary tax-efficient yield to client portfolios.

As a concentrated portfolio of 50 holdings, this solution also looks to mitigate tail risk by factoring in environmental, social and governance (ESG) considerations.

We see value in an all-in-one ETF solution that provides growth, enhanced income, and Responsible Investing (RI) to serve the needs (and wants) of both the current – and next – generations.

Details
BMO Global High Dividend Covered Call ETF (Ticker: ZWG)

Benefits

  • Higher yield – 6.5%2: a combination of high dividends and covered calls
  • Lower volatility – ESG integration can mitigate stock specific risk and call option writing helps to reduce volatility
  • Stable, tax-efficient income – Global stocks that are quality dividend growers with a proven covered call strategy to generate additional tax-efficient income
  • ESG integration and active ownership – Focus on  sustainable business practices to meet long-term objectives, combined with BMO’s active ownership of stocks to boldly grow the good

Trade Idea

ZWG offers broad diversification suitable for your clients’ core equity exposure, across both markets and sectors. Its selection process inherently tilts the portfolio toward higher-quality names – from both a dividend-growing and ESG perspective, resulting in steady, tax-efficient income. And the BMO Global Asset Management covered call overlay method provides incremental yield, with premiums collected. The incorporation of ESG factors helps to reduce stock-specific risk, and the premiums collected act as a buffer against price declines, thereby reducing volatility. Risk mitigation is an important trait in the current environment with potential macro-headwinds and political uncertainty on the horizon.

Case in point: its yield for the underlying portfolio is 3.8%3, while the covered call mandate targets a supplemental 3%-4% in additional tax-efficient income. Offering this higher level of yield, ZWG represents a practical tool Advisors can offer to further diversify portfolios and participate in growth, for improved, and more balanced, overall construction.

ZWG also has exposure to attractive ex-U.S. valuations, which is especially appealing with many clients concerned about overvalued U.S. equity markets in the current late-cycle. Its forward-looking price-to-earnings ratio is 14.5, versus 16.8 for the MSCI World Index, while the return on equity is 19.2% versus 16.6%, providing supportive fundamentals for the strategy.

ZWG-Holdings-EN.JPG#asset:3725

Source: BMO Global Asset Management, as of January 31, 2020.

Diversification Across Sectors AND Geographies:

ZWG MSCI World Index
Dividend Yield 3.8% 2.7%
Target Option Yield 3%-4% 0%
Forward Price/Earnings Ratio 14.5 16.8
Return on Equity 19.2% 16.6%
Forward Price/Earnings-to-Growth 3.3 2.7

Source: Bloomberg, as of January 31, 2020.

Lastly, ESG considerations are a fundamental part of the portfolio construction process, which is a positive driver for the vehicle going forward, particularly as demand for RI becomes more mainstream among investors across generations. ZWG leverages the proprietary research of our Responsible Engagement Overlay (reo ®) team in the UK, a service designed to identify, actively manage and report on ESG risks in institutional client portfolios.

Outlook
Global growth is turning a corner, which means further room for upside with respect to risk assets, especially outside the U.S. Implementing a strategy that adds exposure to a global high-dividend-focused portfolio – while earning call option premiums – allows clients to stay invested and access diversified, long-term capital growth, while also remaining defensive through the extra income boost. Given the current macro backdrop, we expect demand from clients will continue to flourish for solutions that provide the best of both worlds – and all through an ESG lens to achieve their longest-term objectives.

 

 

1 BMO Global Asset Management.

2Ibid.

3 Bloomberg, yield as of January 31, 2020.

4 Bloomberg, as of January 31, 2020.