ZWB: Just finished reading the Money Saver's email warning " Avoiding The Yield Trap " on covered call ETF's . [BMO Covered Call Canadian Banks ETF]

BMO Covered Call Canadian Banks ETF (ZWB)
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BMO Equal Weight Banks Index ETF (ZEB)
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Hamilton Canadian Financials Yield Maximizer ETF (HMAX)
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Q: Just finished reading the Money Saver's email warning " Avoiding The Yield Trap " on covered call ETF's . Where it mentions ETF's yielding in excess of 10% yet uses a BMO banking covered call as an example . I believe all the Hamilton ETF covered call products yield in that 10% or better area and in the case of the banking ETF ZWB used as an example, HMAX yields 15% which beats ZEB's 10 year return by over 5% . And that doesn't take into account the 50% of the HMAX portfolio that contains the underlying stock which should return 50% of the return on ZEB .....If ZEB over 10 years returns 9.6% then HMAX should return the annual yield of 15% plus 4.8% reflecting the 50% of the portfolio containing the underlying stock .... There will also be a small capital gain/loss reflecting the covered call side of their holdings which I have no idea how to calculate so have ignored .... Please explain how I would be missing out growth in the banking sector using the example the Money Saver used were I to purchase HMAX instead of ZWB ? 15% + 4.8% = 19.8% which doubles ZEB's return ...... Please explain the flaws in my logic. { I suspect they are there I just don't know what they are }

Also could 5i give me a list of all the Hamilton ETF products that operate like HMAX { 50% of the portfolio with the underlying securities } with an explanation of what sector they represent, their current yield in percent , and annual dividend amount { I'd like this number so I can calculate the yield on any given day while I follow them and make my decisions on whether and when to purchase }

Thanks for your great service in helping us DIY investors ......

Asked by Garth on February 26, 2024

5i Research Answer:

The components of yield and return may be getting mixed up when comparing HMAX and ZEB. First, the 15% yield that is being mentioned is HMAX's target yield. As per HMAX's fact sheet "Target yield is an estimate of the annualized yield an investor would receive if the target distribution remained unchanged for the next 12 months, stated as a percentage of the net asset value per unit on the as at date." So addressing the first component of the question it is true that HMAX's target yield is greater than ZEB's ten-year annualized total return, but these are unfair measures to compare. Target yield is a measure that helps tell investors what percentage of the current securities price they should expect to recieve in distribution income over an annualized period in this case. We are unsure where the 4.8% return component on the underlying stocks for HMAX was derived from, but distribution yield and capital appreciation/depreciation from securities cannot be simply added together to get total return. Financial websites can accurately provide total return which is comprised of the dollar value distribution income and capital gains/losses on the security over a specified time period. HMAX is a newer ETF, but annualized total return since inception is approximately 1.14%. What the Money Saver article is trying to display in that section was that investors are sacrificing capital appreciation for distribution income through the covered call strategy. ZEB has a yield of approximately 4.8% while ZWB has a yield of approx. 7.6%, but ZWB's total returns are higher on an annualized basis. The article shows that the price appreciation from ZEB outweighed the covered call strategy but the choice between the two depends on whether an investors wants that guaranteed income from ZEB or more general capital appreciation with a smaller portion of return coming from distributions in ZWB.

All the Hamilton Yield Maximizer products hold at least 50% in underlying securities from what we can see and given that there are nine of these products, we would be happy to provide you with the data if you were to specify a few industries/products in particular you were interested in.

Authors of this answer, directors, partners and/or officers of 5i Research and/or affiliated companies have a financial or other interest in ZWB.

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