Covered call ETFs have become a popular alternative for investors seeking a little extra yield.
Here’s how they work. An ETF will invest in a portfolio of underlying securities. The manager will then sell call options for extra income. In exchange for the income, the portfolio creates an obligation to sell the shares at a certain price on a certain date.
The result is an ETF that offers an attractive current yield while sacrificing upside potential. It might not an ideal setup for investors looking for growth, but it’s a nice strategy for retirees looking for succulent yields.
The BMO U.S. High Dividend Covered Call ETF (TSX:ZWH) is one of Canada’s largest covered call ETFs. It has a market cap of just under $620 million, trading more than 60,000 shares per day. It has ample liquidity for retail investors.
There is also version of the ETF denominated in U.S. dollars that trades on the Toronto Stock Exchange.
The ETF has a total of 93 different holdings, which all pay attractive dividends. Top holdings include AT&T (5.2% of total assets), Philip Morris International (5% of assets) and Pfizer Inc. (4.4% of assets). The largest sector holdings include safe areas of the market such as utilities (12.3% of assets), health care (11.8% of assets) and consumer staples (11.3% of assets).
Including distributions, $10,000 invested in the ETF on its debut would be worth more than $16,500 today.
One potential downside to this fund is the management-expense ratio. Including taxes, the MER comes to 0.71%, which is quite high.
