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ZPAY BMO Premium Yield: Looking Beyond Standard Stock and Bond Exposure

Matt Carvalho

ZPAY BMO Premium Yield: Looking Beyond Standard Stock and Bond Exposure

Snapshot

Stock markets have recovered the majority of their losses year-to-date, while bonds yields have plummeted to new lows. Where can investors go for something which might not move exactly like either of those? As an alternative exposure, we took a look at BMO Premium Yield ETF (Ticker: ZPAY).

Details

BMO Premium Yield ETF (Ticker: ZPAY)

Benefits

De-risk equity exposure AND access higher tax-adjusted returns than traditional fixed income.

Trade Idea

This strategy invests roughly one-third of its assets into a portfolio of U.S. large-cap securities, which generally have more stable incomes and higher-quality balance sheets than the overall market. Yield is generated from writing covered calls, as well as puts, on the target positions it owns.

The ability to participate in some stock market returns, while also generating tax-efficient income from the options premiums that are generally considered as capital gains, is appealing.

After investing small amounts in preferred securities, managers are forced to buy when stock prices fall (and puts are exercised), or to sell after meaningful gains have occurred (and calls are exercised against current holdings), which seemingly creates a repeatable method of buying low and selling high.

Early 2020 was an enormous test for any fund strategy, and ZPAY proved to have a significantly smaller downturn relative to S&P/TSX 60 Index, while also having the ability to participate in some of the recovery during the period shown in the chart below. 

July-2020-matt-carvalho-chart-EN.JPG#asset:4398

Sources: Morningstar Direct 2020. ZPAY inception date: January 15, 2020. Past performance is no guarantee of future results.

We expect volatility to remain elevated for the remainder of the year, which this strategy benefits from by taking advantage of larger premiums on the options it sells. If markets move sideways over the second half the of year, the fund’s 6% yield1 could be meaningful to an investor’s total return.

We would view such a strategy as an alternative to the core stock and bond positions our clients already hold. Moreover, we are always looking for additional strategies to help make portfolios robust in a variety of different investing environments.

Outlook

Both the downturn and the subsequent recovery in stock markets this year have been unprecedented. With global virus concerns and political uncertainty in the U.S. likely to continue for much of 2020, allocators face a tough choice of where to weight portfolios. Strategies like ZPAY could potentially be attractive in this environment, particularly for investors who are looking to lighten their equity risk without increasing their exposure to bonds with extremely low yields.

 

1  Morningstar Direct, annualized distribution yield as of June 22, 2020.

Matt Carvalho

ZPAY BMO Premium Yield: Looking Beyond Standard Stock and Bond Exposure

Snapshot

Stock markets have recovered the majority of their losses year-to-date, while bonds yields have plummeted to new lows. Where can investors go for something which might not move exactly like either of those? As an alternative exposure, we took a look at BMO Premium Yield ETF (Ticker: ZPAY).

Details

BMO Premium Yield ETF (Ticker: ZPAY)

Benefits

De-risk equity exposure AND access higher tax-adjusted returns than traditional fixed income.

Trade Idea

This strategy invests roughly one-third of its assets into a portfolio of U.S. large-cap securities, which generally have more stable incomes and higher-quality balance sheets than the overall market. Yield is generated from writing covered calls, as well as puts, on the target positions it owns.

The ability to participate in some stock market returns, while also generating tax-efficient income from the options premiums that are generally considered as capital gains, is appealing.

After investing small amounts in preferred securities, managers are forced to buy when stock prices fall (and puts are exercised), or to sell after meaningful gains have occurred (and calls are exercised against current holdings), which seemingly creates a repeatable method of buying low and selling high.

Early 2020 was an enormous test for any fund strategy, and ZPAY proved to have a significantly smaller downturn relative to S&P/TSX 60 Index, while also having the ability to participate in some of the recovery during the period shown in the chart below. 

July-2020-matt-carvalho-chart-EN.JPG#asset:4398

Sources: Morningstar Direct 2020. ZPAY inception date: January 15, 2020. Past performance is no guarantee of future results.

We expect volatility to remain elevated for the remainder of the year, which this strategy benefits from by taking advantage of larger premiums on the options it sells. If markets move sideways over the second half the of year, the fund’s 6% yield1 could be meaningful to an investor’s total return.

We would view such a strategy as an alternative to the core stock and bond positions our clients already hold. Moreover, we are always looking for additional strategies to help make portfolios robust in a variety of different investing environments.

Outlook

Both the downturn and the subsequent recovery in stock markets this year have been unprecedented. With global virus concerns and political uncertainty in the U.S. likely to continue for much of 2020, allocators face a tough choice of where to weight portfolios. Strategies like ZPAY could potentially be attractive in this environment, particularly for investors who are looking to lighten their equity risk without increasing their exposure to bonds with extremely low yields.

 

1  Morningstar Direct, annualized distribution yield as of June 22, 2020.

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