1 Top High-Yield Dividend ETF to Buy and Generate Passive Income

The ZWB ETF is pretty much one of the easiest choices that investors can make when it comes to security and income. So let’s look at why.

On the lookout for a way to generate passive income while tapping into the strength of Canada’s banking sector? The BMO Covered Call Canadian Banks ETF (TSX: ZWB) might just be your ticket to financial freedom. This exchange-traded fund (ETF) offers investors a unique blend of high dividend yields and potential capital appreciation. All wrapped up in one convenient package.

ETF stands for Exchange Traded Fund

Source: Getty Images

The ETF

So, what’s the scoop on ZWB? Essentially, this ETF provides exposure to Canada’s “Big Six” banks. These institutions have long been the bedrock of Canada’s financial system, known for stability and consistent performance. But here’s where ZWB adds a little extra flavour. It employs a covered call strategy.

This strategy means the fund holds shares of these banks and simultaneously writes call options on them. The approach aims to boost income through the premiums collected from these options, effectively enhancing the overall yield for investors. It’s like having your cake and eating it too – enjoying dividend income while pocketing additional option premiums.

Now, let’s talk numbers. As of writing, ZWB was trading at approximately $19 per unit. Over the past year, the ETF has experienced a modest decline of about 3.8%, down from $19.83 at the start of the year. While this dip might raise an eyebrow or two, it’s essential to consider the broader context and the inherent stability of the underlying holdings.

The holdings

Speaking of those holdings, the recent earnings season has shed some light on the performance of Canada’s major banks. Royal Bank of Canada (TSX: RY), for instance, reported record net income of $5.1 billion for the quarter ended January 31, 2025, marking a significant increase from the previous year. This robust performance was bolstered by a 48% jump in income from its wealth management division, showcasing the bank’s diversified revenue streams.

Not to be outdone, Canadian Imperial Bank of Commerce (TSX: CM) also delivered impressive results. The bank’s capital markets unit saw a net income of $619 million, up 19% from the same period last year. Overall, CIBC’s adjusted net income rose to $2.2 billion, reflecting a strong performance across its various business segments.

However, it wasn’t all sunshine and rainbows. Toronto Dominion (TSX: TD) faced some headwinds, particularly in its U.S. retail operations. The bank reported a 61% drop in earnings from its U.S. retail business, primarily due to challenges stemming from previous compliance issues. Despite this setback, TD’s adjusted earnings per share still came in higher than analysts’ estimates, underscoring the resilience of its core operations.

What to watch

So, what does this mean for ZWB investors? The ETF’s performance is inherently tied to the fortunes of these banking giants. The recent earnings reports highlight a mixed bag. While some banks are thriving, others are navigating challenges. However, the covered call strategy employed by ZWB can help cushion the impact of such fluctuations by generating additional income, potentially offsetting capital losses.

Looking ahead, the Canadian banking sector continues to exhibit resilience. Factors such as robust capital positions, diversified revenue streams, and prudent risk management practices position these banks well for future growth. For investors seeking passive income, ZWB offers an attractive yield, thanks in part to the premiums collected from its covered call strategy.

Bottom line

In conclusion, the BMO Covered Call Canadian Banks ETF presents a compelling option for those aiming to generate passive income while gaining exposure to Canada’s stalwart banking sector. While no investment is without risks, the combination of high dividend yields and the potential for additional income through covered calls makes ZWB a noteworthy consideration for income-focused investors. As always, it’s prudent to assess your individual financial goals and risk tolerance before making investment decisions.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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