1 Defensive Dividend Fund I’d Buy Over Shopify in a Bear Market

BMO Covered Call Utilities ETF (TSX:ZWU) could be one of the best investments you’ll make, as the TSX Index risks falling into a bear market.

| More on:
Make a choice, path to success, sign

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

The U.S. market plunged into a bear market (a 20% fall from peak to trough) this month. The Canadian stock market may not be far behind, even if commodity prices remain as elevated as they are right now. With a recession potentially on the horizon and more interest rate hikes on the way, it’s hard not to be bearish. Indeed, bear markets can be vicious in nature.

This will be our third bear market in around four years. Though they always feel so painful in the heat of the moment, it’s worth taking a step back to consider the long-term picture. Bear markets happen, and they’re only healthy. Though they’re awful when they happen, long-term investors should embrace them with open arms, as there’s a lot of money to be made when stocks are, on average, down around 20% from their peak levels.

Don’t be afraid to buy the bear market!

Looking under the hood, a lot of stocks are down much more than the TSX or S&P 500. Heck, Shopify (TSX:SHOP)(NYSE:SHOP) stock finds itself down more than 80% from its high. The e-commerce stud suffered a massive fall from grace, and we may very well see the stock shed 85% or even 90% of its value once this horrendous selloff finally ends.

Undoubtedly, the dip buyers have not found much success with shares of Shopify thus far. Eventually, things will change, but until inflation rolls over without the need for even more rate hikes, it’s hard to be bullish about the great things going on at the company itself. At the end of the day, a stock market is a market of stocks. And not all merchandise ought to be marked down so substantially as a result of broader market panic.

Doubling down your defences

Though Shopify stock may be a great buy here, I think the magnitude of volatility leaves it in a no-fly zone for most beginners. Instead, I’d much rather be an owner of a high-yield ETF like BMO Covered Call Utilities ETF (TSX:ZWU), which is one of the most defensive ways to invest in equities. In a bear market, it’s no time to be a hero. Instead, it’s time to prepare your defences in case things get worse. Bear markets tend to be measured in months, not just weeks. As such, investors must have something to fall back on in case markets don’t rebound as quickly as we expect them to.

With a lofty 0.71% MER (management expense ratio), the ZWU is not cheap. You’ll pay the ETF managers a considerable chunk. However, with a covered call thrown in, I consider the price to be worth paying, especially given how bad things can get with broader markets.

Utilities tend to hold their own in vicious selloffs. Still, they can fall substantially, as fear turns into panic. With a covered call strategy thrown into the equation, investors get a bit more yield in return for capital upside. In a bear market, where the trajectory is down, the premium income generated from the writing of covered call options offers more peace of mind. At writing, the ZWU yields a whopping (and safe) 7.1%!

Bottom line

While you could scoop up a basket of utility stocks and write your own covered calls, doing so would be quite expensive. Not to mention many investors don’t have access to the options market through their brokerage. Indeed, the MER is high, but it’s high for a reason. It makes it convenient to double down your defences in this hostile market.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify.

More on Investing

potted green plant grows up in arrow shape
Stocks for Beginners

1 Canadian Growth Stock That Could Double Your Money in an Economic Recovery

The market downturn is an opportunity to lock growth during the economic recovery. This stock is a blend of value,…

Read more »

Bank sign on traditional europe building facade
Investing

RRSP Investors: Here’s the Best Canadian Bank Stock for Your Buck

Bank of Montreal (TSX:BMO)(NYSE:BMO) stock is getting far too cheap to ignore after the latest spill in the big Canadian…

Read more »

analyze data
Dividend Stocks

2 Safe Dividend Stocks That Could Help You Fight Inflation

A dependable stream of passive income is one way to help offset rising inflation rates. Here are two top dividend…

Read more »

edit Person using calculator next to charts and graphs
Dividend Stocks

Stay Invested in a Recession: Increase Positions in 2 Value Stocks

The suggestion of market analysts is to increase positions in two value stocks if you want to stay invested amid…

Read more »

Diagonal chain made of zeros and ones. Cryptocurrency and mining.
Cryptocurrency

Is This the End for Crypto?

Bitcoin (CRYPTO:ETH) is in the midst of its worst crash in years. Is this the end?

Read more »

Business success with growing, rising charts and businessman in background
Investing

4 Growth Stocks That Could Make You RICH by 2030

Canadians should take advantage of discounted growth stocks like goeasy Ltd. (TSX:GSY) and others in this summer bear market.

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Dividend Stocks

3 Dividend Stocks to Buy as Inflation Surges in Canada

If you're worried about how surging inflation may impact your portfolio, here are three of the best dividend stocks to…

Read more »

You Should Know This
Dividend Stocks

High Inflation: The Good and the Bad for Canadians

Consider tucking away some of your long-term savings in quality dividend stocks like Brookfield Infrastructure in this correction.

Read more »