The longest history for comparison in Canadian exchange traded funds (ETFs) is between ZEB (BMO Equal weight Banks) and ZWB (covered Call equal weight banks). BMO covered call ETFs balance between cash flow and participating in rising markets by selling out-of-the-money call options on about half of the portfolio. This approach allows to capture the modest growth and generate cash from two sources: regular dividends and premiums from call options. The current MER difference is 43 basis points so in order to benefit from paying the higher fees for the covered call overlay, it’s best owned when one is more bearish or neutral on the market versus when one is bullish. In the long run, since the inception of the ETFs in 2011, ZEB has returned 10.71 per cent and ZWB has returned 8.34 per cent annualized.
There a several basic regimes to measure relative performance.
- Small gains or losses
- Strong Rally
- Strong Decline (rapid, volatile)
| DATES | REGIME | ZEB | ZWB |
|---|---|---|---|
| 04/08/25-05/23/25 | Strong Rally | 16.98 | 14.85 |
| 01/30/25-04/08/25 | Strong Decline (Rapid) | -12.97 | -12.68 |
| 10/30/23-01/30/25 | Strong Rally | 54.28 | 42.36 |
| 02/09/22-10/30/23 | Strong Decline (Volatile) | -24.71 | -24.10 |
| 03/23/20-02/09/22 | Strong Rally | 153.79 | 128.61 |
| 02/21/20-03/23/20 | Strong Decline (Rapid) | -39.67 | -39.36 |
| 01/22/18-02/21/20 | Small Gains/Losses | 6.43 | 6.29 |
| VVVV | Strong Rally | 38.62 | 30.12 |
| 09/18/14-08/03/16 | Small Gains/Losses | -0.73 | 1.24 |
| 06/21/13-09/18/14 | Strong Rally | 47.06 | 37.36 |
| 03/26/12-06/21/13 | Small Gains/Losses | 1.25 | 2.60 |
| 11/25/11-03/26/12 | Strong Rally | 21.67 | 18.20 |
| 04/01/11-11/25/11 | Strong Decline | -18.59 | -17.16 |
| 02/03/11-04/01/11 | Strong Rally | 9.65 | 8.35 |
The rule of thumb is that if you are very bearish and think a rapid decline is possible, ZWB with likely perform better than ZEB, but not by much. If you think the markets will go sideways more than up or down, ZWB will likely perform better than ZEB. But if you are bullish, you MUST own ZEB to get maximum upside capture.
For now, I’d favour a tilt to being a bit more defensive. The most recent rally off the April 8 low outperformed by more than two per cent. Timing markets is very tough, and we do not recommend it for most investors. This example is with the perfect benefit of hindsight. We like the covered call ETFs for more defensive higher income seeking investors, but as history has shown, owning the underlying stocks is a much better longer-term strategy if you can handle the full ride.
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