BMO US Banks Covered Call ETF (ZWK): Assessing Dividend Reliability and Opportunity Amid Sector Dynamics

The recent correction of distribution figures for certain BMO ETFs has underscored the importance of due diligence for income-focused investors. While the BMO Target 2027 Canadian Corporate Bond ETF (ZXCO) saw its quarterly distribution revised downward to CAD $0.090, the BMO US Banks Covered Call ETF (ZWK) remains on track with its confirmed monthly dividend of CAD $0.145, payable on July 3, 2025. This article evaluates ZWK's income stability, the role of its covered call strategy in steady payouts, and the strategic opportunity arising from its upcoming ex-dividend date.

The Dividend Correction Context: Clarifying the ETFs

The confusion between ZXCO (a bond ETF with a corrected distribution) and ZWK (the covered call US banks ETF) is understandable but critical to resolve. While ZXCO's adjustment reflects bond market realities, ZWK's CAD $0.145 monthly dividend remains unchanged, as confirmed in BMO's May 21, 2025, announcement. This distinction is vital: ZWK's strategy—writing covered call options on a portfolio of U.S. regional and mid-sized banks—aims to generate steady income while capping upside potential, a structure that aligns with its confirmed payout.

Income Stability: The Covered Call Advantage

The covered call strategy underpinning ZWK's operations offers a reliable income stream, even amid U.S. banking sector volatility. By selling call options on its holdings, ZWK earns premiums that contribute to its monthly dividends. This approach provides downside protection: if the banks' stocks decline, the premiums buffer losses, while upside gains are capped if stocks rise beyond the strike price.

ZWK's annualized yield of ~1.74% (based on its CAD $0.145 monthly dividend) is competitive with peers like the SPDR S&P Regional Banking ETF (KRE), which yields ~2.1%. However, ZWK's covered call structure may offer smoother cash flows, as option premiums stabilize income regardless of directional market moves.

Strategic Opportunity: Timing the Ex-Dividend Date

The ex-dividend date of June 27, 2025, creates a clear deadline for investors seeking the July 3 payout. To qualify, shares must be owned by the close of June 27. This timing coincides with a period of heightened scrutiny of U.S. banks amid rising interest rates and regulatory pressures.

Historically, ZWK has maintained a stable dividend, with the CAD $0.145 monthly payout persisting since late 2024. This consistency suggests the ETF's portfolio—weighted toward banks like KeyCorp (KEY) and Comerica (CMA)—is generating sufficient premiums to sustain payouts.

Risks and Considerations

While ZWK's covered call strategy mitigates downside risks, it also limits upside potential. A sharp rise in U.S. bank stocks could leave investors “capped” at the strike price, reducing total returns. Additionally, the sector's exposure to interest rate cycles and regulatory shifts (e.g., stress tests, capital requirements) poses risks.

Comparing ZWK's performance to KRE reveals that ZWK has underperformed slightly in rising markets but outperformed during corrections, reflecting its income-focused design.

Investment Advice

For income-oriented portfolios seeking diversification beyond traditional fixed income, ZWK presents a compelling opportunity, particularly ahead of its June 27 ex-date. Key considerations:
1. Hold Before the Ex-Date: To capture the July 3 dividend, purchase shares by June 27.
2. Assess Sector Exposure: Pair ZWK with broader bank ETFs (e.g., KBWD) or bond ETFs (e.g., AGG) for balanced income and risk management.
3. Monitor Rates and Regulations: Rising rates could pressure bank stocks, but ZWK's covered call premiums may offset some downside.

Conclusion

The BMO US Banks Covered Call ETF (ZWK) stands out as a disciplined income vehicle, leveraging its strategy to navigate U.S. banking sector dynamics. While not immune to market risks, its confirmed dividend and structural safeguards make it a viable option for investors prioritizing steady cash flow. With its ex-dividend date looming, now is the time to evaluate its role in a diversified income portfolio.

Disclosure: Always consult a financial advisor before making investment decisions. Past performance does not guarantee future results.