# Is there a place for ZWU in my RRIF?



## jimbob.seeker (Sep 12, 2013)

Hello fellow forum members/readers,

I would appreciate any comments on the wisdom of buying the BMO Covered Call Utilities ETF, ZWU in my RRIF.

Up to a year ago, my RRIF was almost all fixed income (bonds and GICs). My return was between 3 and 4% and that, combined with my other sources of income, was enough to finance my retirement.

My original plan was to convert a portion of my RRIF to an annuity but the payouts have been so low, I kept kicking the can down the road.

Now I find myself sitting on 25% cash in my RRIF because so many of my ~4% bonds have matured over the past year or so.

I would be happy to buy more bonds but unfortunately, yields are so low these days, this is impractical.

In a deviation from my previous strategy of having only fixed income in my RRIF, I am now thinking of investing about a third of my RRIF cash in ZWU. (For the remaining cash, I am considering buying blue chip dividend stock on pullbacks.)

If I were to buy an annuity today, the best payout I could get is about $6,000 p.a. on a $100,000 premium. The ZWU etf provides a yield north of 6.5%. Plus I still retain my capital. The underlying securities (in ZWU) are big utilities, telcos and the like, so I figure that my capital is safe in the long run. The fund manager does all the work of managing the covered calls which makes the enhanced yield possible. The MER is 0.71% which I don't mind paying, considering the exceptional yield.

Any and all comments on buying ZWU at today's prices would be greatly appreciated.

Thanks,
JimBob


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## AltaRed (Jun 8, 2009)

I won't comment on your material change in asset allocation from fixed income to a significant equity component. No one else can either unless they understand what your overall equity/fixed income allocation target is per your IPS for your entire portfolio and how this change impacts the entire portfolio. Clearly you've been around the block a few times given you are talking about a RRIF and not an RRSP. Do you need the additional income to fund your cash flow needs?

Assuming moving 25% of your RRIF to equity is sound, why not all of that 25% be in ZWU rather than a mixed bag of other things? Why do you want that complication in retirement when portfolio simplification is usually the trend? FWIW, I presume you have investigated the track record of ZWU and you are satisfied with its relative lack of volatility and performance relative to the overall broad market index?

Added: FWIW2, I think ZWU is a fairly good niche/boutique choice for those focused on cash flow reliability over total performance. I just don't like the MER.


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## jimbob.seeker (Sep 12, 2013)

AltaRed, thank you so very much for your response. 



> > I won't comment on your material change in asset allocation from fixed income to a significant equity component. No one else can either unless they understand what your overall equity/fixed income allocation target is per your IPS for your entire portfolio and how this change impacts the entire portfolio <<


It took a great deal of consideration, but I think I am finally ready to accept the risks that come with having a quarter of my RRIF in equities. However, I intend take a very measured approach in choosing the stocks. That is why I'm soliciting comments/opinions from the great minds that frequent this forum.



> > Do you need the additional income to fund your cash flow needs? <<


Yes, I've postponed many expenditures over the past five years. Now I must pay the piper.



> > why not all of that 25% be in ZWU rather than a mixed bag of other things? <<


I have asked myself the same thing. The only answer I have is the need to diversify (it's been pounded in my head so often over the years).



> > I presume you have investigated the track record of ZWU and you are satisfied with its relative lack of volatility and performance relative to the overall broad market index? <<


Yes, the chart and the dividend history look good to me. However, my technical expertise is limited so I would definitely like to hear opinions from others on ZWU as a long term hold for a retiree looking for stable income.



> > I think ZWU is a fairly good niche/boutique choice for those focused on cash flow reliability over total performance. <<


Thank you for that comment. Reliable cash flow is exactly what I want (more than overall performance).

Please let me know if you have any other comments or questions. The questions you have asked are an excellent reality check for me, thanks

Regards & Thanks,
JimBob


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## Beaver101 (Nov 14, 2011)

^


> ... Yes, the chart and the dividend history look good to me. However, my technical expertise is limited so I would definitely like to hear opinions from others on ZWU as a long term hold for a retiree looking for stable income. ...


 ... just commenting on this quote/ZWU. Not a retiree (yet) but have this in my RRSP for the past (at least 5 years) ... its price doesn't move much up or down (+/-5%) but the cashflow keeps going (despite the higher MER) ... I'm a buy and holder. 

Likely move it to my RRIF too when that time comes.


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## james4beach (Nov 15, 2012)

ZWU performs dramatically worse than ZUT, which has the same utilities stocks. Look at this massive difference:

ZWU, 5 year return: 5.66%
ZUT, 5 year return: 13.14%

I know everyone loves cashflow, but holy crap, is that really worth *forfeiting 7.5% annual performance?*

Why not hold ZUT and just sell units as needed?


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## Beaver101 (Nov 14, 2011)

^ Too late now for me.


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## jimbob.seeker (Sep 12, 2013)

Beaver101 and James4beach,

Your remarks are very encouraging and helpful.
Thank you both very much.
I will be looking into ZUT.

Regards & Thanks,
JimBob


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## AltaRed (Jun 8, 2009)

james4beach said:


> ZWU performs dramatically worse than ZUT, which has the same utilities stocks. Look at this massive difference:
> 
> ZWU, 5 year return: 5.66%
> ZUT, 5 year return: 13.14%
> ...


I have never been interested in boutique (slice and dice) ETFs, so have never studied these 2 in depth, but your post definitively brings the differences front and center. The two ETFs have significantly different approaches and purpose. The decision as to which one depends on the degree of stability (or not) one wants.

The OP has already said cash flow (income) is more important than Total Return and the reason I posted the comments I did in post #2. Does one want reduced volatility and cash flow vs total return performance? The Morningstar chart for ZWU that I linked clearly shows how ZWU underperforms the broad market. Remember the OP is going from an all 'fixed income' RRIF to going 25/75, and furthermore, this is a RRIF in withdrawal, rather than the building of a RRSP in accumulation.


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## plasmasnake (Apr 17, 2014)

Is ZUT really worth the 0.6% MER, though? It's just 15 equal-weight utility stocks (not that much effort to manage that yourself).

I've held ZWU in part because 1) the 30% US exposure without having to deal with currency exchange, 2) it also holds telecom stocks (both US and Canadian), and 3) because of the covered calls. I've been having second thoughts about it lately, though. I might be OK with giving up the gains in return for the lower volatility, but if you look at the historical chart you'll see that while the gains are limited, you can still lose capital on it. So I'm not sure in practice if it protects you from the downside as much as it takes away from the upside (this might not be very scientific, but if you plot ZWU against ZUT you'll see that when ZUT drops, so does ZWU by a roughly comparable level).

I'd prefer the equivalent of ZWU without the covered calls, if such a thing existed.


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## AltaRed (Jun 8, 2009)

That tells you covered calls are of limited value....except to boost recurring income. That would seem to fit the persona of those members here who emphasize income over total return. One cannot have their cake and eat it too on a multi-year basis. Each person needs to decide what is important to them and put it in an IPS, the vehicle that makes one think about what it is they really want and then to execute accordingly. It does not have to be complicated but it requires the writer to be thoughtful/methodical rather than impulsive/whimsical.

Stock pickers also need to understand the majority of retail investors have no ability or interest in stock picking, or the priority in time to do so. They are willing to pay an MER for the convenience of an ETF. Doesn't make it right or wrong, only different.


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## plasmasnake (Apr 17, 2014)

AltaRed said:


> Stock pickers also need to understand the majority of retail investors have no ability or interest in stock picking, or the priority in time to do so. They are willing to pay an MER for the convenience of an ETF. Doesn't make it right or wrong, only different.


Sure, I agree in general, and I'm OK with broad-based ETFs, which incidentally also have much lower MERs. For example:

XIU (iShares S&P/TSX 60 Index ETF, with 61 constituent stocks) has an MER of 0.18%

XIC (iShares Core S&P/TSX Capped Composite Index ETF, with 230 constituent stocks) has an MER of 0.06%

In comparison, ZUT has 15 constituent stocks and an MER of 0.61%. So if you're going to buy, say, $20K of ZUT, to me it makes more sense to buy the 15 underlying stocks and save the management fee. I wouldn't say that for XIU and XIC.

IMO buying an ETF with only 10-15 holdings is no different from stock picking.

XUT is an even bigger joke - 10 holdings, 0.61% MER. I think that just goes to show that narrow ETFs like this are probably just designed to be opportunistic with those who might be investing smaller amounts of money that they can't practically spread across 10-15 stocks.


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## james4beach (Nov 15, 2012)

Beaver101 said:


> ^ Too late now for me.





AltaRed said:


> but your post definitively brings the differences front and center. The two ETFs have significantly different approaches and purpose. The decision as to which one depends on the degree of stability (or not) one wants.


My post wasn't a totally fair comparison. They do have different purposes. One is trying to generate high cash payouts so it's not quite fair to just look at the total return performance comparison.

The covered call ETFs successfully deliver high cashflow, but not high returns.


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## AltaRed (Jun 8, 2009)

plasmasnake said:


> XUT is an even bigger joke - 10 holdings, 0.61% MER. I think that just goes to show that narrow ETFs like this are probably just designed to be opportunistic with those who might be investing smaller amounts of money that they can't practically spread across 10-15 stocks.


Of course they are opportunistic. Design something cute (boutique style), charge a hefty MER and the masses will buy. Just llke the mutual fund industry all over again. 

I lament the day the number of ETFs passed 100 in total number... and strayed from broad market combinations.


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## jimbob.seeker (Sep 12, 2013)

AltaRed, Beaver101, james4beach and plasmasnake,

I can't thank you enough for bringing the salient points to the fore with this fantastic discourse.

You are a fabulous bunch.

Regards & Thanks,
JimBob


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## Numbersman61 (Jan 26, 2015)

Interesting discussion. Since I’m almost 80, I decided to buy some ZWU for my RRIF. Recurring income is important to me at this stage in my life.


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## james4beach (Nov 15, 2012)

Numbersman61 said:


> Interesting discussion. Since I’m almost 80, I decided to buy some ZWU for my RRIF. Recurring income is important to me at this stage in my life.


You might also want to take a look at VRIF, which also delivers consistent cash payouts (that's what they intend any way).

A big difference is that VRIF is a diversified portfolio, basically a balanced fund.


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## Numbersman61 (Jan 26, 2015)

james4beach said:


> You might also want to take a look at VRIF, which also delivers consistent cash payouts (that's what they intend any way).
> 
> A big difference is that VRIF is a diversified portfolio, basically a balanced fund.


Thanks for the suggestion, James.


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## MrMike (Sep 30, 2020)

I have several split-share funds and covered call ETFs in my margin account but I didn't buy ZWU - they have a lower yield than some, is more volatile and their chart is declining:









Compared to something like TXF where all 3 of those aspects are better:










My personal favorite income fund is EIT. I've only had it for 6 months but my father has had it for other 10 years now. The only times they missed dividends were during the 2 crashes (2008 and covid - and covid was only 3 months I believe.)

Maybe after I've bought the others I want to buy, I'll relook at ZWU. On my pending list are:
RS
SGR.UN
TNT.UN
BRE
BGI.UN
HUTL
FCD.UN


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## fireseeker (Jul 24, 2017)

MrMike said:


> I have several split-share funds and covered call ETFs in my margin account but I didn't buy ZWU - they have a lower yield than some, is more volatile and their chart is declining:
> ...
> Compared to something like TXF where all 3 of those aspects are better:


I don't think the comparison says anything about the merits (or lack thereof) of a fund like ZWU.

Rather, it shows that during a decade of declining interest rates, a fund focused on utilities did poorly while a fund focused on tech did well. 
This is what you'd expect.


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## jimbob.seeker (Sep 12, 2013)

MrMike said:


> I have several split-share funds and covered call ETFs in my margin account but I didn't buy ZWU - they have a lower yield than some, is more volatile and their chart is declining:
> 
> Compared to something like TXF where all 3 of those aspects are better:
> 
> ...


Thank you very much for the input, MrMike. I will have a close look at your list.

Regards,
JimBob


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## ddivadius (Apr 28, 2017)

HDIV may be of interest. It is new and is an ETF of income ETFs (incl. ZWU). 8.5% yield. 
You may also be interested in ZPAY, ZPH, PYF or PAYF which would be a bit safer.


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