The days of elevated rates of risk-free (or less risky) assets may be coming to an end as the Federal Reserve and Bank of Canada keep chipping away at interest rates.
That said, just because the Fed or the Bank of Canada is your “friend” as an investor now that they’re likelier to cut than hike does not mean stocks will be a free ride higher. Not only do a company’s earnings mean more in the grander scheme of things, but there’s a lot of the low-rate world ahead that’s already factored into the valuation of today’s more rate-sensitive names.
Remember, if you overpay for a stock based on a more favourable environment that could be ahead, you won’t do yourself any good.
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Don’t trade lower rates over the near term: They may not fall as fast as you think
Heck, it could be a money-losing proposition to buy stocks on news that everyone else has already had the chance to act on. That’s why I’d encourage investors not to be too aggressive with their portfolios on the basis that rates will fall in 2025 or 2026.
Instead, I think investors would be better off spotting companies that are mispriced to the downside to extract hidden value that may not be visible to most other retail investors.
Indeed, rates are coming down, but nobody knows how fast. That’s why trading stocks or the market based on rate predictions is a terrible idea. If you’re at all worried about a downside of falling rates, it’s lower yields on your beloved dividend players or REITs (real estate investment trusts).
In this piece, we’ll look at one ETF that’s worth picking up if you value yield and are fearful rates will act as a drag on the yield going into the next two years or so.
ZWC: A covered call ETF with a higher yield and less choppiness
Enter BMO Canadian High Dividend Covered Call ETF (TSX: ZWC), an ETF that takes the passive income to the next level. Undoubtedly, the covered call strategy trades off upside potential (think less capital gains) for options premium income.
The result is a supercharged (but still secure) yield that you’d be hard-pressed to find anywhere else. If you’re an investor who’s worried about meagre returns amid questionable market valuations (at least in the States), I’d argue the family of solid high-yield covered call ETFs are worth a look.
The ZWC is a portfolio of a basket of high-yield dividend stocks with the added benefit of call option premiums added right on top. If the market’s destined to drag its feet, such premiums can be like sprinkles on top of a sundae or extra sweetener to a cappuccino.
With a 6.69% yield, the ZWC is a standout for those who want above-average yields before they have a chance to dip as rates fall off over the long haul. Now, that’s not to say yields will only go down from here. They can certainly rise over the near term.
However, if you’re convinced rates will be much lower by next year, I’d argue it’s better to start owning higher-yielders today rather than waiting around and not collecting the income that would have gone your way.
