BMO launches enhanced income covered call ETFs

Jul 13th, 2017 | By | Category: Alternatives / Multi-Asset

BMO Global Asset Management has launched a suite of enhanced income ETFs on London Stock Exchange. The three ETFs – tracking UK, eurozone and US equities – provide exposure to stocks with sustainable dividend yields and also utilise a covered call option overlay strategy.

Rob Thorpe, head of UK intermediary, BMO Global Asset Management

Rob Thorpe, head of UK intermediary, BMO Global Asset Management.

The funds each have a total expense ratio (TER) of 0.30% and are listed below along with their ticker codes:

BMO Enhanced Income UK Equity UCITS ETF (ZWUK)
BMO Enhanced Income Euro Equity UCITS ETF (ZWEU)
BMO Enhanced Income USA Equity UCITS ETF (ZWUS)

The new ETFs use a covered call strategy to boost the income of their benchmark equity indices, the FTSE 100, the Euro Stoxx 50 and the S&P 500.

A covered call is an options strategy whereby an investor holds a long position in an asset and sells or “writes” call options on that same asset in an attempt to generate more income (the additional income from option premium) than the asset would otherwise provide on its own from dividends or other distributions.

Option-based strategies take advantage of the supply-demand imbalance that exists between investors looking to hedge their equity positions and the lower number of hedge providers. This allows the fund to harvest the volatility risk premium and generate income for investors while managing the downside risk.

Terry Wood, lead fund manager and director, systematic strategies at BMO Global Asset Management (EMEA) said: “Historically, enhanced income strategies have provided a similar overall return to the underlying portfolio with a reduction in volatility. The benefits of these strategies include receiving an increased yield and allowing an investor to participate in rising markets with lower volatility by limiting upside potential in exchange for call premiums.”

Rob Thorpe, head of UK intermediary, BMO Global Asset Management (EMEA), added: “Investors’ search for yield is as strong as ever, as is their focus on ensuring their portfolios are protected on the downside, minimising volatility risk. With this new suite of ETFs we are able to directly address many concerns that professional investors have, which is how they can precisely manage their portfolios to a desired level of income, while still maintaining the potential for capital gains. We expect they will find our new range of high yielding ETFs a very useful tool.”

Income is distributed quarterly and the ETFs target a yield enhancement of 3% over the chosen equity benchmark, an expected total gross yield of around 5% for the US fund, and approximately 7% for the UK and eurozone ETFs.

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