Q – What do you think of ZWT, issued by BMO?
Should we understand that they use cover calls to generate income and finance their interesting distribution of 4.5 per cent? How does the use of covered call options help in mitigating downside risk (as they say in the documentation)?
I understand that when you sell covered calls, you will be obligated to sell the stock at a certain price if it goes up. But when the value decreases, nobody will buy. To protect against a market decrease, don’t we need a put option? – Marcel B.
A – ZWT is the trading symbol for the BMO Covered Call Technology ETF. It invests in securities of technology and technology-related companies in addition to writing covered call options to generate cash flow. The premiums received from the option writing provide the downside protection BMO refers to, but it’s very limited.
If the price of an optioned stock goes down, the option expires worthless and a new one can be written.
This is a new fund, launched in late January, so we don’t have any historical data to compare it with similar ETFs. It’s also expensive, with a management expense ratio of 0.73 per cent.
The Harvest Tech Achievers Growth and Income Fund (TSX: HTA) has a similar mandate. It posted a one-year gain of 39 per cent to the end of September. It’s also expensive, with a management fee of 0.85 per cent.
You can also look at the CI Tech Giants Covered Call ETF (TSX: TXF). It has a lower management fee than the Harvest fund at 0.65 per cent but its recent returns are not as strong. – G.P.