The Attractive Dividend Yield of BMO AAA CLO ETF (Hedged Units)

In today's rising interest rate environment, income-focused investors are increasingly on the hunt for assets that balance stability with yield. Enter the (Hedged Units) (ZAAA.F), a compelling option for those seeking consistent cash flow without sacrificing capital preservation. With a current yield of 7.39%, ZAAA.F has carved out a niche as a low-volatility, high-yield alternative to traditional fixed-income investments. Let's break down why this ETF deserves a closer look—and how it fits into a modern income portfolio.

The Power of CLOs in a Rising Rate World

Collateralized loan obligations (CLOs) are structured finance instruments that pool together leveraged corporate loans and issue tranches of debt and equity backed by these assets. The tranches, which form the core of ZAAA.F's portfolio, are designed to offer predictable cash flows with relatively low credit risk. Unlike traditional bonds, CLOs are less sensitive to interest rate hikes because their floating-rate loans adjust with market conditions. This makes them a natural hedge against the volatility that plagues fixed-rate bonds in a tightening cycle.

ZAAA.F's recent performance underscores this resilience. Despite a 0.07% dip in its share price over the past 24 hours, the fund's net asset value (NAV) has risen 0.32% in the last month. This divergence highlights the ETF's ability to maintain intrinsic value even as market prices fluctuate—a critical trait for income investors prioritizing long-term stability.

Why the 7.39% Yield Matters

The ETF's monthly dividend of CAD 0.134 per unit (paid on August 5 and September 3, 2025) translates to a robust 7.39% yield based on its current price of CAD 30.14. For context, this outpaces the average yield of Canadian corporate bonds and most dividend-paying equities. But the real magic lies in the hedging strategy. By using currency forward contracts and futures, ZAAA.F minimizes exposure to CAD/USD fluctuations, ensuring that U.S.-denominated CLOs don't erode returns when the Canadian dollar wavers.

This hedging mechanism is a game-changer. Consider an investor who owns ZAAA.F without hedging: a 5% drop in the CAD/USD exchange rate could cut their effective yield by half. ZAAA.F's active management neutralizes this risk, making it a rare “best of both worlds” play—high yield with reduced currency volatility.

A Case for Active Management and Diversification

ZAAA.F's success isn't just about yield—it's about structure. The fund's active management by BMO Global Asset Management ensures a diversified portfolio, with no single CLO holding exceeding 10% of assets. This limits downside risk while maintaining exposure to a broad range of high-quality, floating-rate loans. Additionally, the fund's ability to hold cash or short-term instruments during market stress provides a buffer against liquidity shocks—a feature that becomes increasingly valuable in a tightening rate environment.

The Risks and the Rationale

No investment is without risk. While AAA-rated CLOs are generally stable, they're not immune to defaults in the underlying loan portfolios. However, ZAAA.F's focus on high-grade tranches and its active risk management mitigate this concern. Moreover, the fund's 148.96 million CAD in AUM and 147.51 million CAD in inflows over the past year suggest strong institutional confidence—a vote of confidence in its strategy.

For investors, the key takeaway is this: ZAAA.F offers a rare combination of high yield, low volatility, and currency protection. In a world where traditional income assets are under pressure, this ETF provides a reliable anchor for portfolios.

Final Verdict: A Must-Have for Income Portfolios

If you're building a high-yield, low-volatility income portfolio, ZAAA.F should be on your radar. Its monthly dividends, hedging strategy, and active management make it a standout in a crowded market. While it's not a replacement for equities or long-term growth assets, it's an excellent complement for those prioritizing cash flow and capital preservation.

In a rising rate environment, income investors can't afford to settle for low returns. ZAAA.F's 7.39% yield and risk-mitigated structure offer a compelling alternative—one that's worth a spot in any well-rounded portfolio.