BMO Canadian ETF Dashboard

— as of August 31, 2019 —

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O Canada, Covered Calls Stand on Guard for Thee

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.

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.