BMO Covered Call Canadian Banks ETF (ZWB.TO)

The great thing about covered calls is that they offer you some upside when things are going down, but also take some of the downside away when things are going up. The “covered call” methodology regulates so that the highs are less high and the lows are less low.

Dividends aren’t going up. The premium on the options is lower. The dividends on the underlying banks are increasing, but the premium on the covered calls has been coming down.

(Top Pick Jan 19/16, Up 34%) Another core holding. BMO has a number of good covered call strategies.

Individual banks have done a lot better, so why should a person buy this ETF? If you have enough money to buy all 5 banks individually and you don’t mind paying for 5 trade tickets, then you might very well be better off buying the 5 banks. If you are worried about banks going sideways, this at least gives you the chance to make some money on the covered call writing that this ETF does.

In a strong upward market it will underperform the equal weight without covered calls. Despite what others have said, these are not bad for long term holds. They do not, however, replace fixed income because you have equity exposure.

30% was return of capital in 2016. In the beginning of 2016 there was about 65 million units outstanding. By the end there were 5 million new units. They then had to pay out on additional shares. They do a return on capital so that everyone gets the same amount of payout. You are not getting your own money back. It is an adjustment because there are now more units. This is the structure of a growing fund.

Covered call ETFs from BMO etc. pay mostly eligible dividends. A TFSA should have VERY taxable things in it and put ETFs like this one OUTSIDE the TFSA.

Covered call banks, but ZWC-T covers more economic sectors. Banks are 21% of the TSX and are that potion of ZWC-T.

There is no real negative from the covered call strategy in a dropping market unless the stock goes down by large up & down movements. However, it enhances your yield while you are waiting out the downturn.

The MER is in the 40-50 basis point range. The enhanced yield is created with an option writing overlay. They write one standard deviation out of the money. The options can enhance yield 1.5 percentage points over time.

It has a covered call overlay. A lot of good news is priced into the banks so he would not be chasing this one, but be a dup-buyer in the Canadian banks.

If he were a sector guy, financials is a sector he would be in. Canadian equities have been a very solid investment for the past while, especially with the covered call option. A very good product.

This has been pretty good from an income standpoint. Canadian banks have done well. They already had a good year, and then accelerated up to the American banks on the yield curve. Canadian banks have done about as much is they are going to do, so he would tend to move away. The US banks are attractive. If looking for income, you really should look at the Canadian preferred share market. If in a registered account and don’t want to worry about withholding tax, you may want to look at iShares S&P US Preferred (PFF-N).

He took a bit off the table in Canadian financials. After you get through the reporting period, seasonality suggests lightening on the Canadian banks after this point. Early March you get another push for financials. Interest rates will have a big impact.

If the price of banks go above what they have sold their covered calls for, is that much of a risk? You have to understand that this only writes options on half the positions, so half the stocks can continue to rise. Also, covered calls can be rolled up. He doesn’t think this would be a huge risk.