BMO Canadian ETF Dashboard

— as of June 30, 2020 —

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In Turbulent Markets, Defence is the Best Offence

Larry Berman

In Turbulent Markets, Defence is the Best Offence

Snapshot
Given the late stage of the business cycle now, and current market instability, investment in alternative income strategies that have lower overall volatility and higher yield is an excellent way to improve a portfolio’s defensive characteristics. Financial markets in most regions globally have become expensive, and risk factors have grown, especially with coronavirus fears rampant. As this all starts to unwind, Advisors should look to attractive strategies like BMO Premium Yield ETF (Ticker: ZPAY) to help protect client returns and keep them confident for the long haul.

Details
BMO Premium Yield ETF (Ticker: ZPAY)

Benefits

  • Enhanced income – option strategies used to generate incremental yield
  • Reduced volatility and risk – lower correlation to both equity and fixed income products
  • Greater diversification – for overall better – and more balanced – portfolio construction
  • Tax efficiency – option premiums and growth from long U.S. equities exposure are taxed as capital gains
  • Partial market exposure – dynamic, nimble strategy that responds to market conditions (does not fully capture upside or downside)

Trade Idea
With interest rates at historic lows, and trending even lower, there is a dramatic hunt for yield among investors, and one of the ways to achieve robust returns in this environment is through option strategies. ZPAY is designed to find the best high-quality, large-cap stocks in the U.S. market (with strong balance sheets and dividends), while writing puts and calls on these companies to generate an approximate 6%-plus yield. As a world-leader in option-based ETF strategies, BMO Global Asset Management employs its renowned covered call overlay method to write out-of-the-money calls on roughly 50% of the shares to earn premiums, while maintaining long exposure to the remaining 50% to provide upside potential (as market conditions change, the portfolio’s equity and option exposure varies). The incremental yield from the premiums collected acts as a buffer against price declines, thereby reducing volatility – an important characteristic amid potential macro headwinds on the horizon.

While ZPAY doesn’t fully eliminate the downside, the option overlay strategy allows for substantially lower risk since the upside is also capped, while targeting 2.5-3 times the yield of the S&P 500. From a defensive standpoint, this combination is attractive for clients who want more “sleep-at-night” factor in their portfolio and enhanced income. In this late-cycle, low interest rate environment, alternatives are a practical solution to safeguard investments from short-term risks, while boosting returns.

Lastly, ZPAY boasts favourable tax treatment because option premiums are taxed as capital gains, as are the distributions generated from the long U.S. equity exposure portion. 

ZPAY: Less risk than the broad market 

Feb-2020-L-Berman-graph.jpg#asset:3822

Source: Bloomberg, February 28, 2020. 

Outlook
The rapid market sell-off in recent weeks tells us that we’ve experienced an unexpected growth challenge with coronavirus, and investors were not ready for it. In this type of environment, clients can sell and go to cash, but cash yields zero, and that’s why ZPAY is a better alternative for many Canadians who require enhanced yield to sustain their lifestyles.

Given how far the cycle has extended, markets have been trained that corrections resolve within a matter of weeks. But coronavirus – and the disruption to global supply chains – could drag on markets for months, especially if more drastic quarantine measures are used. The reality is that uncertainty prevails on duration, and even on whether the Fed’s response will be enough. China now accounts for a much bigger slice of global growth than it did during the SARS outbreak.

While ZPAY is not a fixed income replacement in the sense that it’s still equity market exposure, it provides necessary peace of mind for risk-averse clients seeking stable yield – in any climate.

Larry Berman

In Turbulent Markets, Defence is the Best Offence

Snapshot
Given the late stage of the business cycle now, and current market instability, investment in alternative income strategies that have lower overall volatility and higher yield is an excellent way to improve a portfolio’s defensive characteristics. Financial markets in most regions globally have become expensive, and risk factors have grown, especially with coronavirus fears rampant. As this all starts to unwind, Advisors should look to attractive strategies like BMO Premium Yield ETF (Ticker: ZPAY) to help protect client returns and keep them confident for the long haul.

Details
BMO Premium Yield ETF (Ticker: ZPAY)

Benefits

  • Enhanced income – option strategies used to generate incremental yield
  • Reduced volatility and risk – lower correlation to both equity and fixed income products
  • Greater diversification – for overall better – and more balanced – portfolio construction
  • Tax efficiency – option premiums and growth from long U.S. equities exposure are taxed as capital gains
  • Partial market exposure – dynamic, nimble strategy that responds to market conditions (does not fully capture upside or downside)

Trade Idea
With interest rates at historic lows, and trending even lower, there is a dramatic hunt for yield among investors, and one of the ways to achieve robust returns in this environment is through option strategies. ZPAY is designed to find the best high-quality, large-cap stocks in the U.S. market (with strong balance sheets and dividends), while writing puts and calls on these companies to generate an approximate 6%-plus yield. As a world-leader in option-based ETF strategies, BMO Global Asset Management employs its renowned covered call overlay method to write out-of-the-money calls on roughly 50% of the shares to earn premiums, while maintaining long exposure to the remaining 50% to provide upside potential (as market conditions change, the portfolio’s equity and option exposure varies). The incremental yield from the premiums collected acts as a buffer against price declines, thereby reducing volatility – an important characteristic amid potential macro headwinds on the horizon.

While ZPAY doesn’t fully eliminate the downside, the option overlay strategy allows for substantially lower risk since the upside is also capped, while targeting 2.5-3 times the yield of the S&P 500. From a defensive standpoint, this combination is attractive for clients who want more “sleep-at-night” factor in their portfolio and enhanced income. In this late-cycle, low interest rate environment, alternatives are a practical solution to safeguard investments from short-term risks, while boosting returns.

Lastly, ZPAY boasts favourable tax treatment because option premiums are taxed as capital gains, as are the distributions generated from the long U.S. equity exposure portion. 

ZPAY: Less risk than the broad market 

Feb-2020-L-Berman-graph.jpg#asset:3822

Source: Bloomberg, February 28, 2020. 

Outlook
The rapid market sell-off in recent weeks tells us that we’ve experienced an unexpected growth challenge with coronavirus, and investors were not ready for it. In this type of environment, clients can sell and go to cash, but cash yields zero, and that’s why ZPAY is a better alternative for many Canadians who require enhanced yield to sustain their lifestyles.

Given how far the cycle has extended, markets have been trained that corrections resolve within a matter of weeks. But coronavirus – and the disruption to global supply chains – could drag on markets for months, especially if more drastic quarantine measures are used. The reality is that uncertainty prevails on duration, and even on whether the Fed’s response will be enough. China now accounts for a much bigger slice of global growth than it did during the SARS outbreak.

While ZPAY is not a fixed income replacement in the sense that it’s still equity market exposure, it provides necessary peace of mind for risk-averse clients seeking stable yield – in any climate.