Canadian savers are searching for ways to build self-directed RRSP portfolios that can deliver steady dividends and attractive long-term returns. One popular strategy involves buying ETFs that give investors exposure to baskets of stocks in certain sectors or stocks that have similar characteristics.
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ETF advantage
An ETF is attractive for self-directed investors who want to get the benefits of a mutual fund without paying the high fees. An ETF also offers more flexibility for investors because it trades just like a stock.
The ETF industry has ballooned in the past decade, giving investors a wide variety of options that go from simply tracking an index to complicated and higher-risk plays that deliver multiples on the daily moves of things like commodities.
For RRSP investors who tend to prefer to invest for years rather than trade their positions daily or weekly, it makes sense to search for ETFs that will create a balanced portfolio of high-quality stocks. Picking ETFs that track sectors gives RRSP investors a chance to buy on pullbacks. In theory, this can lead to better long-term returns than holding ETFs that mimic the broader market.
An interesting type of ETF to consider is one that boosts returns by placing covered calls on the equities held inside the portfolio. Selling options on the stocks can increase income on top of dividend streams and boost the overall yield.
BMO Covered Call Canadian Banks ETF
BMO Covered Call Canadian Banks ETF (TSX: ZWB) gives investors a chance to get exposure to the stocks of the Canadian banks while earnings some extra cash on call option premiums.
Bank stocks are down considerably from their 2022 highs and now offer attractive dividend yields. The group remains very profitable, and the multiples are at a level that should be attractive for buy-and-hold RRSP investors.
At the time of writing, ZWB trades near $20.30 compared to the 2022 high around $23.40. The current annualized yield is about 6.5%.
BMO Canadian High Dividend Covered Call ETF
BMO Canadian High Dividend Covered Call ETF (TSX: ZWC) is an option for RRSP investors who want to get exposure to top dividend stocks across a variety of industries. The ETF increases income by writing covered call options.
Stocks chosen for the portfolio are vetted based on dividend-growth rates, yield, and a company’s payout ratio. This ideally ensures the portfolio owns high-quality companies, not just stocks with large dividend yields that might be at risk of trimming the payout.
Top holdings in the portfolio include picks from a variety of sectors including communications, energy infrastructure, commodities, financials, and railways.
At the time of writing, ZWC trades for $19 compared to the 2022 high around $20.40. The current annualized yield is about 6.25%.
The bottom line on ETFs for RRSP investors
Buying high-yield ETFs can help self-directed RRSP investors reduce the risk that comes with picking individual stocks while giving exposure to a target segment though a single holding. The management fees are lower than what you would pay on most mutual funds and the nature of the ETF provides flexibility to buy or sell on any trading day.
