In a low interest rate world, the income challenge is both real and prolonged. Our three new Enhanced Income Exchange Traded Funds are designed to offer investors a source of attractive and cost-effective yield.
Meeting investor demand for income
There are many ways to enhance a portfolio's income and covered calls have been used within many funds as a source of additional ‘yield' through the option ‘premium' paid to the issuer. However, up to now, the UK fund industry primarily offered this strategy in an actively managed, stock-picking format. BMO Global Asset Management are the first to offer an Enhanced Income range of UCITS ETFs employing covered calls. When investors are looking for a yield in the region of 5-7% a simple, low-cost passive fund is now an option.
Covered calls explained - the owner of a share can seek to generate additional return by selling a call option - the right to buy the share at a pre-agreed price until a set expiry date. Until the option is exercised the issuer retains the benefits of share ownership, such as receiving dividends and upside participation, capped at the exercise price.
A systematic solution
Cost is one of the drivers behind the growth of exchange traded funds (ETFs) but in order to be effective, we believe that ETFs need to be able to satisfy a real client need. At BMO Global Asset Management, each of our ETFs is designed to meet a challenge our clients are facing. Since 2011 for example, our income orientated ETFs in Canada (where we are the 2nd largest ETF provider) have successfully delivered a cost effective source of yield to our clients. We are looking to build on this heritage with the launch of three new UCITs ETFs in the UK.
| ETF | Benchamark | Ticker |
| BMO Enhanced Income UK Equity UCITS ETF | FTSE 100 | ZWUK |
| BMO Enhanced Income US Equity UCITS ETF | S&P 500 | ZWUS |
| BMO Enhanced Income Euro Equity UCITS ETF | Eurostoxx 50 | ZWEU |
Each of these Enhanced Income ETFs physically replicates its respective market index before an overlay strategy of index call options is applied in order to enhance the income. Using a broad based index approach counters the diversification considerations associated with a strategy simply orientated towards ‘higher yielding' areas of the stock market. Looking at the US market for example, placing an emphasis on higher yielding shares will result in the portfolio being underweight IT and discretionary sectors whilst having an emphasis on utilities and staples. In other words, portfolio diversification is compromised in the search for income.
Importantly, the funds aim to strike an appropriate balance between yield generation and scope for capital growth. In keeping with this, index options are typically written on around 50% of the portfolio's value.
For investors there are a number of key benefits:
- Enhanced income - in normal market conditions, the use of covered calls can enhance the overall portfolio yield by around 3%. Please remember that yields are not guaranteed and are subject to fluctuation.
- Maintaining diversification - by tracking a broad market index and by writing options on that index, stock and sector biases are avoided.
- Lower volatility - a focus on income generation can serve to reduce volatility relative to the wider market by giving up some upside potential in exchange for call premiums.
- Upside potential - writing calls on around 50% of the portfolio maintains participation in underlying equity growth. In strongly rising markets however, it is important to remember that the strategy will likely lag the broader index should purchasers choose to exercise their right to buy.
A new solution for yield hungry investors
Estimated portfolio yield in normal market conditions
Source: BMO Global Asset Management, Bloomberg, dividend yield as at 31 May 2017
For further information on our BMO Enhanced Income Equity ETFs please visit: www.bmogam.com/Enhanced-Income-ETFs
Please remember that yields are not guaranteed and are subject to fluctuation. Past performance is not a guide to future performance. The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.
Investing in ETFs involves risk, including risks associated with market volatility, currency rate fluctuations, replication strategies, and changes in composition of the underlying index and assets.
All rights in the FTSE 100 Index vest in FTSE International Limited ("FTSE"). "FTSE®" is a trade mark of the London Stock Exchange Group companies and is used by FTSE under licence.
The BMO Enhanced Income UK Equity UCITS ETF Fund has been developed solely by BMO Global Asset Management which is a trading name of F&C Management Limited. The Index is calculated by FTSE or its agent. FTSE and its licensors are not connected to and do not sponsor, advise, recommend, endorse or promote the
BMO Enhanced Income UK Equity UCITS ETF Fund and do not accept any liability whatsoever to any person arising out of (a) the use of, reliance on or any error in the Index or (b) investment in or operation of the Fund. FTSE makes no claim, prediction, warranty or representation either as to the results to be obtained from the BMO Enhanced Income UK Equity UCITS ETF Fund or the suitability of the Index for the purpose to which it is being put by BMO Global Asset Management which is a trading name of F&C Management Limited.
Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned.
For professional investors only. Please remember that yields are not guaranteed and are subject to fluctuation. Past performance is not a guide to future performance.
© 2017 BMO Global Asset Management. All rights reserved. BMO Global Asset Management is a trading name of F&C Management Limited, which is authorised and regulated by the Financial Conduct Authority. CM13629 UK (07/17).
