If you’re looking to boost your passive income, BMO Canadian High Dividend Covered Call ETF (TSX: ZWC) deserves a closer look. The exchange-traded fund (ETF) currently offers a distribution yield of about 6.3%, paid out as monthly cash distributions — making it a potential choice for income investors seeking more than the Canadian stock market’s average yield of roughly 2.1%.
Of course, there’s no such thing as a free lunch. ZWC’s higher yield comes from a covered call strategy that offers meaningful benefits but also involves trade-offs investors should understand before buying.
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Why ZWC pays such a high yield
Unlike a traditional dividend ETF, ZWC doesn’t rely solely on dividends from the companies it owns. It also generates income by writing covered call options on its portfolio, collecting option premiums that are distributed to unitholders alongside dividend income.
The ETF, which manages approximately $2.4 billion in assets, follows a rules-based strategy that selects Canadian dividend stocks based on dividend yield, dividend growth, payout ratio, and liquidity. The result is a portfolio built around some of Canada’s most established businesses while generating an additional stream of income from options.
This strategy makes ZWC particularly attractive for investors who prioritize dependable cash flow. Option premiums can also provide a modest cushion during market pullbacks, helping soften declines when stocks are under pressure.
The trade-off is that covered calls cap part of the portfolio’s upside. If Canadian equities rally sharply, ZWC will likely trail a traditional dividend ETF because some gains are effectively exchanged for higher current income.
A portfolio of Canadian dividend leaders
One of ZWC’s biggest strengths is the quality of its underlying holdings. The ETF owns roughly 40 blue-chip Canadian companies, with significant exposure to sectors that have long rewarded shareholders with dependable dividends.
Its largest positions include Royal Bank of Canada, Toronto-Dominion Bank, CIBC, and Bank of Nova Scotia, which together account for about 26% of the portfolio. Another 19% is invested in leading energy companies, including Canadian Natural Resources, Enbridge, Suncor (TSX: SU), and TC Energy. Other notable holdings include Bank of Montreal and utility giant Fortis.
Professional management and the active covered call strategy contribute to a management expense ratio (MER) of 0.72%. While that’s higher than many passive ETFs, investors seeking enhanced monthly income may find the added cost worthwhile.
Should you buy ZWC?
ZWC isn’t designed to be the highest-growth investment in your portfolio. Instead, it’s built to generate attractive monthly cash flow while reducing some of the volatility that comes with owning equities. That makes it especially appealing for retirees or income-focused investors who value consistent distributions over maximum capital gains.
The ETF is likely to outperform during flat or range-bound markets, where option premiums can meaningfully enhance returns. In contrast, investors should expect it to lag during powerful bull markets because the covered call strategy limits upside participation.
The Foolish investor takeaway
For investors who want to generate more passive income without giving up exposure to Canada’s top dividend stocks, ZWC is worth considering. Its combination of blue-chip holdings, monthly cash distributions, and a yield of about 6.3% makes it a compelling income investment. While it’s probably best used as a complement to a core equity portfolio rather than a replacement for one, ZWC can be an effective way to boost your income.
