When investors start looking for income-focused exchange-traded funds (ETFs), they often end up in the world of covered calls and leverage. The appeal is obvious.
Covered call strategies generate additional option premium income, while leverage can amplify both portfolio exposure and distributions. Combined together, they can produce eye-catching yields that are often much higher than what traditional stock or bond funds provide.
The tradeoff is that there is no free lunch. Covered calls cap part of your upside during strong bull markets, while leverage can magnify losses during downturns. Both strategies also add complexity that many investors may not fully understand.
What often gets overlooked is that there are other ways to generate regular cash flow. Some ETFs use managed distribution policies that can partially fund distributions through capital gains or by systematically selling a small portion of the underlying portfolio.
While some investors dislike the idea of receiving their own capital back, the economic reality is often similar to selling shares yourself. The difference is that the process is automated for you.
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The growth engine: ZGRO
BMO Growth ETF Portfolio (TSX: ZGRO) is designed as a globally diversified, all-in-one portfolio. The ETF maintains a target allocation of approximately 80% equities and 20% fixed income.
Through a collection of underlying ETFs, investors gain exposure to Canadian stocks, U.S. stocks, international developed markets, emerging markets, and global bonds. The portfolio is automatically rebalanced internally, which means investors do not need to worry about maintaining target allocations themselves.
One of the biggest attractions is cost. ZGRO carries a management expense ratio (MER) of just 0.18%, making it a relatively inexpensive way to own a globally diversified portfolio.
The income version: ZGRO.T
For investors who want regular cash flow, BMO also offers ZGRO.T. The underlying portfolio is essentially the same as ZGRO, but the ETF is structured to target a 6% annual distribution yield.
Importantly, that yield is not generated through covered calls or leverage. Instead, the ETF follows a managed distribution approach that can include bond income, dividend payments, and, when necessary, the sale of a small portion of the underlying assets.
Some investors hear that and immediately object. But if you are a retiree spending from your portfolio anyway, you are ultimately selling assets regardless. Whether you manually sell a few units each month or the ETF does it on your behalf, the outcome is often quite similar.
That is why I find products like ZGRO.T interesting. Rather than introducing leverage or option strategies to manufacture yield, the ETF simply packages a globally diversified portfolio together with a systematic withdrawal plan. For retirees and income-focused investors who value simplicity, that can be an attractive solution.
