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Several major stock indexes touched new highs this month and, despite some negative indicators, it doesn’t look like this bull run is going to end any time soon.

There are many ways you can participate in it, but the cheapest and easiest route is by using exchange-trading funds (ETFs). They offer a ready-made portfolio of stocks at reasonable fees. Here are three you might want to consider.

See also: ETF Buyer’s Guide 2019: The complete series

BMO Low Volatility Canadian Equity ETF (ZLB-T)

Current price: $32.77

Annual payout: 84 cents

Yield: 2.6 per cent

Risk rating: Moderate risk

Comments: This fund invests in a portfolio of low-beta-rated Canadian stocks. Beta is a measure of a stock’s sensitivity to broad market movements. The lower the beta, the less sensitive a stock is to big up-and-down swings, and thus to unusually large gains or losses.

The unit price of this ETF was up 11.8 per cent in the first quarter. Investors also receive quarterly distributions, the latest being 21 cents a unit at the beginning of April. Most of the distributions are taxed as either capital gains, eligible dividends or return of capital. In 2018, almost 96 per cent of the total payout was in one of these categories.

This ETF is likely to underperform the S&P/TSX Composite during strong periods, but that’s to be expected from a low-beta security. When the market turns down, this fund will mitigate any losses.

The fund is well-diversified, with 46 positions. Only three have weightings of more than 3 per cent: Fairfax Financial Holdings Ltd. (3.9 per cent), Emera Inc. (3.5 per cent), and Intact Financial Corp. (3.2 per cent). In sector terms, financials dominate at just more than 22 per cent, with utilities at 15.1 per cent and consumer staples at 12 per cent.

The fund was launched in October, 2011, and has assets under management of just under $1.4-billion. The management expense ratio is 0.39 per cent.

I recommend this ETF for investors who wish to reduce stock-market risk.

Harvest Brand Leaders Plus Income ETF (HBF-T)

Current price: $9.55

Annual payout: 64.8 cents

Yield: 6.8 per cent

Risk rating: Moderate risk

Comments: This fund invests in a portfolio of 20 U.S. companies that are leaders in their respective fields. They include firms such as Cisco Systems Inc., Johnson & Johnson Inc., PepsiCo Inc., Microsoft Corp., Nike Inc., etc. The managers supplement the dividend income from these stocks by writing call options on up to one-third of each position.

The units were hit hard by the stock market sell-off in December, falling to a low of $7.81. As it turns out, they were a bargain at that level. They have since rallied strongly and are now trading near their 52-week high.

This type of covered-call fund is increasingly popular among investors who are seeking additional income. Harvest, which is a relatively small player in the ETF business, has attracted about $154-million in assets to this fund. A look at the numbers tells you why: The fund was up 10.7 per cent in the first quarter and the yield is an attractive 6.8 per cent.

If you’re looking for a combination of capital gains and cash flow, this ETF offers it. The management fee is 0.75 per cent.

BMO Covered Call Dow Jones Industrial Average Hedged to CAD ETF (ZWA-T)

Current price: $23.24

Annual payout: $1.08

Yield: 4.7 per cent

Risk rating: Moderate risk

Comments: This ETF tracks the Dow Jones Industrial Average (hedged to Canadian dollars) and uses covered-call options to generate additional income. The options are written (sold) “out of the money," which means the stock is trading below the potential sale or “strike” price. The option premium provides limited downside protection. The underlying portfolio is rebalanced to maintain better representation of the broad market, and options are rolled forward upon expiry.

Writing covered calls has both pluses and minuses. The plus side is the extra income that is generated. The fund recently increased its monthly distribution by half a cent to 9 cents ($1.08 a year).

The downside is that call-writing limits the upside potential of a stock. If the price rises, the option is exercised, and the shares are called away, thereby limiting the capital-gains potential. That’s one reason why we’ve seen only a modest increase in the unit price in the past year.

If your investment focus is on income, this is an appropriate ETF for your portfolio as it offers good cash flow and some market exposure. If you want to maximize capital gains, choose a fund that does not use covered calls.

The management expense ratio is 0.71 per cent.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 01/03/24 2:10pm EST.

SymbolName% changeLast
BMO Low Volatility CAD Equity ETF
Harvest Brand Leaders Plus Income ETF

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