Yesterday's Equity Leaders Weekly discussed bonds, and looking back, it may be one of the more important updates we've delivered this year. For those who missed it, we highlighted the significant sell-off in long-term bonds occurring despite the Federal Reserve lowering benchmark interest rates. This trend is counterintuitive, as bonds typically rise in a falling interest rate environment. While the bond market may have priced in anticipated rate cuts for 2024, the recent movement in the SIA platform, which downgraded bonds in our Asset Class Rank, suggests there are deeper issues—primarily persistent inflation. Additionally, the equity market’s recent surge indicates that investors prefer assets that can appreciate in value over fixed income instruments. As we exit 2024 and enter 2025, we feel we've provided a valuable service to SIA practitioners by recommending an underweight position in fixed income. However, we must also explore alternatives, which is the focus of today's Daily Stock Report. With US equities still dominating the SIA Asset Class Ranking, overweighting equities seems the best strategy. But what about clients who seek income? Should they remain in bonds that may yield returns below inflation, risking a stagnant portfolio? The answer is yes—thanks to advancements in alternative asset classes, there are products that offer both income and growth potential, helping clients keep pace with rising prices. Turning to our trusted SIA platform, we can easily identify these opportunities under the SIA Reports tab, where hundreds of reports are produced daily, alongside millions of relative strength calculations. A standout for ETF investors is the SIA Specialty Equity Report, which ranks 139 unique ETFs daily based on their relative performance. While this report primarily compares equity alternatives, today’s mission is to find fixed income alternatives by sorting for current yield within the Favored (Green) Zone, allowing us to capture the best of both worlds—income and growth.
In this context, the BMO Covered Call Technology ETF stands out at position #7, boasting a 36.02% year-to-date return and a 4.97% yield. The fund includes 61 positions in top-performing mega-cap equities, with its top holdings including Nvidia, Apple, Meta, Google, Amazon, Microsoft, Broadcom, Netflix, Salesforce, and Oracle. These names are all highly ranked within the SIA platform, enabling advisors to grow their clients' assets over time. The real advantage lies in the portfolio managers' strategy of selling out-of-the-money options to generate monthly distributions while providing some downside protection. While this strategy carries inherent risks, yesterday’s report suggested that the primary concern is not a market meltdown, but rather a potential equity market surge that could leave fixed-income investors significantly behind. Thus, having an equity kicker is essential for staying competitive; as the saying goes, the best defense is a good offense. We have prepared two charts for advisors to consider. The first compares the BMO Covered Call Technology ETF (ZWT.TO) with the Vanguard Canada Long-Term Bond ETF (VLB.TO), highlighting the stark outperformance of the former. BMO investors enjoy a 4.97% yield compared to Vanguard's 3.55%, and this comparison becomes even more pronounced when considering that Vanguard investors have lost -1.32% in bond value, while BMO investors have gained 36%. The second chart is our Point and Figure chart, which serves several purposes. It is color-coded to show where the ETF ranks within the SIA Relative Strength matrix, our primary tool for assessing performance. It also illustrates key support and resistance levels, aiding in risk management. Currently, support levels are at $45.24 and $42.63, while resistance levels are at $54.07 and $58.53. Notably, we have outlined a price discovery triangle with two black lines, indicating potential breakout points. A breakout above the triangle suggests a bullish trend is underway, with a move to $48.97 providing confirmation for further upward movement. This ETF has an SMAX score of 8 out of 10, further demonstrating its outperformance relative to all other asset classes, including bonds.
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