ETFs: Three for the money

Choices for safety, income, or growth

Several major stock indexes touched new highs recently and, despite some negative indicators, it doesn’t like this bull run is going to end any time soon. There are many ways you can participate in it, but the cheapest and easiest route is by using exchange-trading funds (ETFs). They offer a ready-made portfolio of stocks at reasonable fees. Here are three you might want to consider. Prices are as of the close on Friday, May 3.

BMO Low Volatility Canadian Equity ETF (TSX: ZLB)
Current price: $32.82
Annual payout: $0.84
Yield: 2.6%
Risk: Moderate
Website: www.bmo.com

Comments: The fund invests in a portfolio of low-beta-rated Canadian stocks. Beta is a measure of a stock’s sensitivity to broad market movements. The lower the beta, the less sensitive a stock is to big up-and-down swings, and thus to unusually large gains or losses.

The unit price of this ETF is up 13.8% so far this year. Investors also receive quarterly distributions, the latest being $0.21 per unit at the beginning of April. Most of the distributions are taxed as either capital gains, eligible dividends, or return of capital. In 2018, almost 96% of the total payout was in one of these categories.

This ETF is likely to underperform for the S&P/TSX Composite during strong period, but that’s to be expected from a low-beta security. When the market turns down, this fund will mitigate any losses.

The fund is well-diversified, with 46 positions. Only three have weightings of more than 3%: Fairfax Financial (3.86%), Emera (3.47%), and Intact Financial (3.21%). In sector terms, financials dominate at just over 22%, with utilities at 15.1%, and consumer staples at 12%.

The fund was launched in October 2011 and has assets under management of just under $1.4 billion. The management expense ratio is 0.39%.

I recommend this ETF for investors who wish to reduce stock market risk.

Harvest Brand Leaders Plus Income ETF (TSX: HBF)
Current price: $9.50
Annual payout: $0.648
Yield: 6.8%
Risk: Moderate
Website: http://harvestportfolios.com/etf/etfbrand-leaders-plus-income

Comments: This fund invests in a portfolio of 20 U.S. companies that are leaders in their respective fields. They include firms like Cisco Systems, Johnson & Johnson, PepsiCo, Microsoft, Nike, etc. The managers supplement the dividend income from these stocks by writing call options on up to one third of each position.

The units were hit hard by the stock market selloff in December, falling to a low of $7.81. As it turns out, they were a bargain at that level. They have since rallied strongly and are now trading near their 52-week high.

This type of covered call fund is increasingly popular among investors who are seeking additional income. Harvest, which is a relatively small player in the ETF business, has attracted about $154 million in assets to this fund. A look at the numbers tells you why: The fund is up 13.5% year-to-date and the yield is an attractive 6.8%.

If you’re looking for a combination of capital gains and cash flow, this ETF offers it. The management fee is 0.75%.

BMO Covered Call Dow Jones Industrial Average Hedged to CAD ETF (TSX: ZWA)
Current price: $23.20
Annual payout: $1.08
Yield: 4.7%
Risk: Moderate
Website: www.bmo.com

Comments: This ETF tracks the Dow Jones Industrial Average (hedged to Canadian dollars) and uses covered call options to generate additional income. The options are written out of the money, which means the stock is trading below the potential sale price (the strike price). The option premium provides limited downside protection. The underlying portfolio is rebalanced to maintain better representation of the broad market, and options are rolled forward upon expiry.

Writing covered calls has both pluses and minuses. The plus side is the extra income that is generated. The fund recently increased its monthly distribution by half a cent to $0.09 ($1.08 per year).

The downside is that call writing limits the upside potential of a stock. If the price rises, the option is exercised, and the shares are called away, thereby limiting the capital gains potential. That’s one reason why we’ve seen only a modest increase in the unit price in the past year.

The management expense ratio is 0.71%.

If your investment focus is on income, this is an appropriate ETF for your portfolio as it offers good cash flow and some market exposure. If you want to maximize capital gains, choose a fund that does not use covered calls.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website. This column originally appeared in The Toronto Star.

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Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.