BMO Ups Ante with New Covered Call ETF

As the number of Canadian’s entering retirement increases and the cost-of-living has skyrocketed, so has the need for many investors to generate additional cash-flow to pay monthly bills. Fortunately, BMO offers a well-timed solution, the BMO Global Enhanced Income Fund ETF Series (ZWQT).

This new fund provides both a sustained monthly cash flow and growth potential by bringing together a diverse group of covered call ETFs in to a professionally managed all-in-one solution.

A covered call is a contract between someone who owns an equity and a potential buyer. It provides the buyer an option to purchase shares of the stock at a set price for a limited period. In return, the issuer of a covered call is paid a premium. In the case of a covered call ETF, each of these premiums helps to increase the fund’s yield and enhance the income of investors.

While there are some investors who write covered calls on their own, many lack the expertise, capital and time to write options on the hundreds of stocks held within a covered call ETF. ZWQT, on the other hand, is a professionally managed solution that enables investors to benefit from a well-diversified portfolio of covered called ETFs through a single trade.

Covered call ETFs continue to be a popular investment vehicle after more than ten years of existence, but there are some who site their drawbacks, given that a covered call strategy could put a cap on the upside potential of a portfolio. According to Erin Allen, Vice President of Online Distribution at BMO ETFs, BMO recognized this concern and set out to remedy it. “At BMO, we use a number of levers in our strategy to strike a balance between generating cashflow and growth potential. One example is that we write covered calls on only 50% of the portfolio. So, names that we're not writing options on have full upside potential.”

This balanced strategy isn’t the only feature that distinguishes ZWQT from competitive products. The top holdings in the fund include the Global High Dividend Covered Call ETF, the US High Dividend Covered Call ETF, and the Canadian High Dividend Covered Call ETF – all BMO products. “Investors should really be aware of what we call double dipping of fees, ”Allen explains. “Many of our competitors don’t have in-house products and instead hold underlying ETFs from third party institutions. Investors could be paying fees on those funds in addition to an overall management fee. BMO’s approach is different because we have all the building blocks in-house, so we don’t need to double dip on fees. As a result, with ZWQT investors pay a relatively low management fee of 0.65%.”

Beyond the ease of this one ticket solution, ZWQT offers investors automatic quarterly rebalancing of the fund, which ensures the portfolio remains diverse as the value of underlying equities fluctuate. “Rebalancing is hard for investors to do on their own.” Allen said. “There's a lot of emotional decisions that come with rebalancing. People put it off, often because they want to see how far their winners can run. But at the end of the day, rebalancing is essential for a fund to stay on track and reach its stated goals.”

Quarterly rebalancing can also provide investors some significant cost savings by avoiding the commissions that they would otherwise be charged to directly buy and sell individual underlying ETFs. The opportunity to save is further enhanced as earned income from covered call options is taxed as capital gains at a more favourable rate.

The BMO Global Enhanced Income Fund ETF Series is based on a conservative covered call writing approach that investors can trust to provide a monthly cash flow of close to 7%*, delivered by an experienced team, who have assembled a long track record that has been battle tested through a variety of market cycles.

Over the past 12 years, BMO is number one in Canada in terms of net new flows into ETFs and has accumulated over $9 billion in assets in covered call ETFs, which translates into about 65% of the market share in Canada – further evidence that BMO is a leader when it comes to bringing new solutions to market to meet the needs of investors.

If you would like to learn more about the BMO Global Enhanced Income Fund ETF Series (ZWQT), contact your investment advisor or discount broker.

*Estimated Distribution Yield was calculated by using the May 31st, 2023 annualized distribution yields for the underlying ETFs. The distribution rate is based on the starting NAV of $15. Distribution yield is not an indicator of overall performance and will change based on market conditions, NAV fluctuations, and is not guaranteed Annualized Distribution Yield: The most recent regular distribution, or estimated distribution,(excluding additional year end distributions) annualized for frequency, divided by current NAV.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate. Certain of the products and services offered under the brand name, BMO Global Asset Management, are designed specifically for various categories of investors in Canada and may not be available to all investors. Products and services are only offered to investors in Canada in accordance with applicable laws and regulatory requirements.

Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus of the BMO ETFs before investing. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.

For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the BMO ETF’s prospectus.  BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

BMO ETFs are managed by BMO Asset Management Inc., which is an investment fund manager and a portfolio manager, and a separate legal entity from Bank of Montreal.

Distributions are not guaranteed and may fluctuate. Distribution rates may change without notice (up or down) depending on market conditions. The payment of distributions should not be confused with an investment fund’s performance, rate of return or yield. If distributions paid by an investment fund are greater than the performance of the fund, your original investment will shrink. Distributions paid as a result of capital gains realized by an investment fund, and income and dividends earned by an investment fund, are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, you will have to pay capital gains tax on the amount below zero. Please refer to the distribution policy for BMO ETF set out in the prospectus.

Cash distributions, if any, on units of a BMO ETF (other than accumulating units or units subject to a distribution reinvestment plan) are expected to be paid primarily out of dividends or distributions, and other income or gains, received by the BMO ETF less the expenses of the BMO ETF, but may also consist of non-taxable amounts including returns of capital, which maybe paid in the manager’s sole discretion. To the extent that the expenses of a BMO ETF exceed the income generated by such BMO ETF in any given month, quarter or year, as the case may be, it is not expected that a monthly, quarterly, or annual distribution will be paid. Distributions, if any, in respect of the accumulating units of BMO Short Corporate Bond Index ETF, BMO Short Federal Bond Index ETF, BMO Short Provincial Bond Index ETF, BMO Ultra Short-Term Bond ETF and BMO Ultra Short-Term US Bond ETF will be automatically reinvested in additional accumulating units of the applicable BMO ETF. Following each distribution, the number of accumulating units of the applicable BMO ETF will be immediately consolidated so that the number of outstanding accumulating units of the applicable BMO ETF will be the same as the number of outstanding accumulating units before the distribution. Non-resident unit holders may have the number of securities reduced due to withholding tax. Certain BMO ETFs have adopted a distribution reinvestment plan, which provides that a unit holder may elect to automatically reinvest all cash distributions paid on units held by that unitholder in additional units of the applicable BMO ETF in accordance with the terms of the distribution reinvestment plan. For further information, see Distribution Policy in the BMO ETFs’ prospectus.

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 For more information on BMO Global Enhanced Income Fund ETF Series (ZWQT) please visit their website at
‍https://www.bmoetfs.ca/etfs/zwqt-bmo-global-enhanced-income-fund-etf-series.

_{FULL DISCLOSURE: BMO is a client of BTV-Business Television. This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional. Any action taken as a result of reading information here is the reader’s sole responsibility.}

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