The BMO Covered Call Canadian Banks ETF (ZWB) is an actively managed fund that holds Canadian bank stocks or units of the BMO S&P/TSX Equal Weight Banks Index ETF (ZEB) and writes covered call options on the underlying securities depending on market conditions. The call options written are slightly out of the money and are rolled forward every month upon expiry. The underlying portfolio is rebalanced twice annually.

Currently, ZWB holds 50% of its assets in ZEB. The rest of the holdings are shares in the big banks and call options written on the shares of the big banks. For example, the fund owns shares in Bank of Montreal (BMO) and has written call options expiring in June 2011 with a strike price of $62 and $64. BMO shares were trading around $62 when the options were written.

The fund charges a management fee of 0.65% but brokerage expenses and commissions are extra. Since its inception in January 2011, the fund has made monthly distributions totalling $0.512 (for an annualized distribution yield of 9.6%). Tax advantaged distributions are a mixture of dividends from the underlying portfolio and option premiums, which are taxed as capital gains. Total returns over that period were 7.2% of which distributions accounted for 3.3%. Over the same time period, the BMO Equal Weight Banks ETF (ZEB) returned 1.11% in the form of dividends and 6.4% in the form of capital gains for a total return of 7.5%.

One would expect ZWB to outperform in flat and down markets and ZEB to outperform when bank shares are advancing sharply. It would be interesting to revisit this topic after a few years to see how (a) ZWB performed relative to ZEB (b) ZWB performed relative to ZEB on an after-tax basis. Personally, I expect to be strictly an observer on this ETF. ZWB’s narrow focus on a single sector alone is enough for me to sit this out completely.

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