Income-focused investors desire to receive consistent, recurring income streams over price appreciation. However, the drawback is that you have to spend time and effort to manage a portfolio with five, 10 or more dividend stocks. Fortunately, there is an alternative to simplify the process, including individual stock selection.
Exchange-traded funds (ETFs) trade like stocks except that you own units, not underlying shares. There’s instant diversification as preferred investment choices are in one basket. Furthermore, you can sit back because the fund is professionally managed.
Today, a top option to buy and generate passive income is BMO Covered Call Energy ETF (TSX:ZWEN). The main attraction of this ETF is its high yield. At $29.33 per unit, current investors partake in the 8.68% annualized distribution yield. Performance-wise, ZWEN is up 12.81% year to date.
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Fund overview
BMO Global Asset Management is your fund manager if you invest in ZWEN. The fund invests in shares of energy and energy-related companies and writes covered call options. BMO GAM can buy an asset at a particular price within a specified date to give the ETF downside protection or reduce volatility.
ZWEN was established on January 22, 2023, and since the inception date, the return is a decent 15.83%. Around 99.53% of the 41 total holdings are in stocks. In March and September, the fund manager rebalances and reconstitutes the portfolio.
Top holdings
BMOGAM does not track an index but actively manages the fund. The primary sector coverage is energy (100%), while the geographical exposures are in the U.S. (70.48%), Canada (20.66%), Norway (4.68%), and France (4.18%). You have American industry giants Williams Companies, Kinder Morgan, Chevron, and Exxon Mobil in the basket.
The Canadian counterparts that round up the top 10 holdings include Enbridge, Canadian Natural Resources, Suncor Energy, and TC Energy. As of December 11, 2024, ENB, SU, and TRP outperform the energy sector and the TSX.
The energy sector has inherent risks, and oil price fluctuations are perennial headwinds. ZWEN carries a high-risk rating, although the large-cap holdings somehow lessen the risk level. You have an all-star cast in a single fund.
Investment takeaway
Industry experts say that while the clean energy supply is fast-growing, it will not yet curtail the growth and demand of fossil fuels or displace their consumption.
Fitch Ratings sees a positive macroeconomic environment and expects relatively supportive sector fundamentals for North America next year, particularly midstream. S&P Global Commodity Insights projects that primary energy demand will grow by more than eight million barrels of oil equivalent per day (boe/d) in 2025.
ZWEN’s advantage is the potential for generating higher passive income since the top 10 holdings, are generous dividend payers. Market analysts also maintain a positive outlook for the energy sector, although geopolitical events could disrupt near-term supply and demand.
The ETF is also an eligible investment in a Tax-Free Savings Account (TFSA). Assuming you use your $7,000 TFSA annual limit to buy ZWEN, your money will produce $623.70 in tax-free passive income, or nearly $52 monthly.
