Utilities Are Great, But I’d Steer Clear Of This ETF

In general, utilities happened to be a sector I'm extremely bullish on right now as a way to stay invested, but also retain a highly defensive position in equities. However, exchange traded funds, (ETFs) like the BMO Covered Call Utilities ETF (TSX:XUT) is not the way to play the sector right now, in my opinion.

The key difference between ETFs with covered call overlays and those with only the underlying holdings, is the presence of call options, which are written to cover a portion of a portfolio of underlying equities to enhance yield.

The premium these options provide allow investors to receive a higher yield than would otherwise be possible with a group of stocks, but acts as an upper ceiling on capital appreciation, effectively, eliminating and investors total return upside in a bullish market.

This is the key here with the stock market so beaten up should utilities make a significant advance higher, a good chunk of the upside investors would have received would effectively be cut, reducing one's total expected return, if one believes a market turnaround is on the horizon.

In my view, the risk of losing out on upside (the whole reason to invest in a beaten up market) far outweighs the additional premium one would receive from writing call options right now. So I would encourage investors to steer clear of this particular ETF, and perhaps focus on an ETF like XUT (similar holdings without the covered call overlay).

Invest wisely my friends.