BMO launched its Covered Call Canadian Banks ETF (TSX: ZWB) in January 2011. The ETF immediately started attracting investor attraction. Investors were mesmerized by the initial annualized yield of 10% and piled money into the fund: among ETFs launched in 2011, ZWB ranked first by Assets under Management by a wide margin. Interestingly, the second most popular among ETFs launched in 2011 is another covered call product: the Horizons Enhanced Income Equity ETF (TSX: HEX). Investors have clearly developed a preference for income products.

It appears that many investors thought (or at least hoped) the higher yield from ZWB compared to a plain vanilla product like the BMO S&P/TSX Equal Weight Banks Index ETF (TSX: ZEB) would translate into higher total returns. Now that ZWB has a 1 year track record under its belt, we can analyze how ZWB’s returns stacks up against ZEB’s.

Performance for the 1-year period ending Jan. 31, 2012
BMO Covered Call Canadian Banks ETF (ZWB): 2.84%
BMO S&P/TSX Equal Weight Banks Index ETF (ZEB): 3.59%

If we look at the income generated by these two ETFs as a percentage of starting NAV, we get:

Income generated for the 1-year period ending Jan. 31, 2012
BMO Covered Call Canadian Banks ETF (ZWB): 9.2%
BMO S&P/TSX Equal Weight Banks Index ETF (ZEB): 3.5%

In other words, though an investor earned a significantly higher current income with ZWB, she would have earned lower total returns compared to an investment in ZEB over the past year. Also, the income an investor receives from ZWB has also been dropping: the current annualized yield is 7.25%. Granted, a one year time frame is too short to make a fair comparison of ZWB and ZEB but the early results are not promising.

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