When it comes to navigating the Canadian exchange-traded fund (ETF) landscape in 2025, two funds stand out for income-focused investors. Those are the BMO Canadian High Dividend Covered Call ETF (TSX:ZWC) and the Hamilton Enhanced Multi-Sector Covered Call ETF (TSX:HDIV). Both aim to provide attractive yields through covered call strategies, but differ in composition and approach.
ZWC
ZWC focuses on high-dividend Canadian companies, employing a covered call strategy to enhance income. This means it holds dividend-paying stocks and writes call options to generate additional premiums. As of the latest data, ZWC boasts a distribution yield of 6.6%, offering investors a steady income stream. The fund’s top holdings include major Canadian banks and energy companies, reflecting its emphasis on stable, high-yield sectors.
In terms of performance, ZWC has shown resilience. Year-to-date, it has delivered a total return of 0.37%. This modest gain underscores its defensive positioning, which can be particularly appealing during volatile market periods. The fund’s strategy of combining dividend income with option premiums has helped cushion against market downturns.
Looking ahead, ZWC’s focus on high-quality, dividend-paying companies positions it well for the future. The covered call strategy may limit upside potential in rapidly rising markets. Yet it provides a buffer during sideways or declining markets. Investors seeking consistent income with moderate growth potential might find ZWC aligns with their objectives.
HDIV
On the other hand, HDIV takes a multi-sector approach by investing in a diversified portfolio of covered call ETFs. This structure offers exposure to various sectors, aiming to replicate the 1.3 times multiple of the Solactive Multi-Sector Covered Call ETFs Index. As of writing, HDIV offers a yield of about 11%, appealing to those seeking higher income.
However, this higher yield comes with increased complexity. HDIV’s use of leverage amplifies both potential returns and risks. While the fund’s diversified approach can mitigate sector-specific downturns, the leverage factor means investors should be prepared for greater volatility. It’s essential to assess whether this aligns with one’s risk tolerance and investment goals.
Performance-wise, HDIV has experienced fluctuations. Over the past 52 weeks, it has risen by an average of 0.6%, based on the past three years of stock performance. While this indicates some growth, the leveraged nature of the fund means that returns can vary more significantly compared to those of non-leveraged ETFs.
Looking forward, HDIV’s strategy of combining sector diversification with a covered call approach may offer substantial income. However, investors should be mindful of the potential for amplified losses due to leverage, especially in volatile markets. It’s crucial to weigh the attractive yield against the associated risks.
Foolish takeaway
Both ZWC and HDIV present compelling options for income-focused investors in 2025. ZWC offers a more traditional approach with a focus on high-dividend Canadian companies and a covered call strategy to enhance income. Its conservative nature may appeal to those seeking steady income with moderate growth potential. HDIV, with its leveraged, multi-sector strategy, provides a higher yield but comes with increased risk and complexity. Investors should carefully consider their risk tolerance and income needs when choosing between these ETFs.
