Banking Income
Utilizing a Canadian Bank Covered Call Strategy
Alfred Lee, CFA, DMS
Vice President & Investment Strategist
BMO ETFs & Global Structured Investments
BMO Asset Management
alfred.lee[at]bmo.com
February 11, 2011
Recent Developments:
- Relative Strength (RS), a technical concept that measures the relationship between two securities, is an efficient means of gauging a stock's or sector's strength to another's. Below, we compare the S&P/TSX Banks Index ("bank index") Index in relation to the broad market as measured by the S&P/TSX Composite (Chart A). In addition, we also compare the bank index to broader S&P/TSX Financials Index (Chart B), which also includes insurers and asset managers. Furthermore, we then compare the strength of the bank index in relation to the U.S. banks using the KBW Bank Index(Chart C).
- Since March of 2010, the Canadian banks have traded in a sideways pattern (Chart D) and have underperformed each of the broad Canadian equity market, the Canadian financial sector and, most recently, the U.S. banks. With a number of the "Big Six" Canadian banks currently focused on acquisitions, stock price appreciation could potentially face headwinds over the near term.
Potential Investment Opportunity:
- A covered call strategy on Canadian banks may be of consideration for investors who are neutral or moderately bullish on the performance of the Canadian banks in the near future. In addition to the dividend yield from the underlying banks, a covered call strategy would also collect premiums from writing call options, thus further increasing its yield.
- The BMO Covered Call Canadian Banks ETF (ZWB) will hold the securities of the "Big Six" Canadian banks, units of BMO S&P/TSX Equal Weight Banks Index ETF (ZEB) and write covered call options against these positions. For details on the mechanics of a covered call strategy, please visit our website at www.bmo.com/etfs or click here.
- This strategy can also be combined with our BMO S&P/TSX Equal Weight Banks Index ETF (ZEB).
Chart A: Relative Strength of Canadian Banks to S&P/TSX Composite
Source: Bloomberg, BMO Asset Management Inc.
Chart B: Relative Strength of Canadian Banks to Canadian Financials
Source: Bloomberg, BMO Asset Management Inc.
Chart C: Relative Strength of Canadian Banks to U.S. Banks
Source: Bloomberg, BMO Asset Management Inc.
Chart D: Canadian Banks Have Traded in a Sideways Pattern Since March 2010
Source: Bloomberg, BMO Asset Management Inc.
*All prices as of market close February 8, 2010 unless otherwise indicated.
Disclaimer:
Information, opinions and statistical data contained in this report were obtained or derived from sources deemed to be reliable, but BMO Asset Management Inc. does not represent that any such information, opinion or statistical data is accurate or complete and they should not be relied upon as such. Particular investments and/or trading strategies should be evaluated relative to each individual's circumstances. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment.
BMO ETFs are managed and administered by BMO Asset Management Inc, a portfolio manager and separate legal entity from the Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in exchange-traded funds. Please read the prospectus before investing. The funds are not guaranteed, their value changes frequently and past performance may not be repeated.
S&P® is a registered trademark of Standard & Poor's Financial LLC and TSX is a trademark of the Toronto Stock Exchange ("TSX") . These trademarks have been licensed for use by BMO Asset Management Inc. BMO S&P/TSX Equal Weight Banks Index ETF is not sponsored endorsed, sold or promoted by S&P or TSX and they make no representation, warranty or condition regarding the advisablility of buying, selling or holding units in the BMO ETF.
