BMO Covered Call Energy ETF (ZWEN.TO): High Dividends Amid Volatility – Is This a Reliable Income Play?

The BMO Covered Call Energy ETF (ZWEN.TO) has captured investor attention with its 9.57% annualized dividend yield, one of the highest among energy-focused ETFs. But can this payout sustain in a sector prone to price swings? This article dissects the ETF's covered call strategy, dividend reliability, and capital appreciation potential in a volatile energy market.

The Covered Call Edge: Income Over Upside

ZWEN.TO's structure combines exposure to energy stocks with covered call options, where the ETF sells the right to buy its holdings at a set price (strike price). This strategy generates premium income, which fuels the high dividends. Since June 2024, the ETF has paid a steady $0.22 CAD monthly dividend, yielding 9.57% as of June 2025. The stability reflects the covered call's ability to lock in income even if energy prices stagnate.

However, this comes at a cost: the ETF caps its upside potential if energy stocks surge beyond the strike price. For income-focused investors, this trade-off may be acceptable, but growth-oriented traders might prefer direct energy equity exposure.

Expense Ratio: A Moderate Drag on Returns

ZWEN.TO's 0.65% expense ratio is higher than broad energy ETFs like the Vanguard Energy ETF (VDE, 0.09%) or the Energy Select Sector SPDR (XLE, 0.08%). But its active covered call strategy justifies the fee compared to passive peers. The expense ratio reduces net returns, but the ETF's 8.74% distribution yield (as of Q2 2025) suggests the premium income sufficiently covers costs.

Key Comparison:
- ZWEN.TO: 0.65% expense ratio, 9.57% dividend yield.
- VDE: 0.09% expense ratio, 2.3% dividend yield (as of 2025).

Investors must weigh the higher fees against the trade-off of steady income versus lower yields elsewhere.

Capital Appreciation: A Double-Edged Sword

Energy markets are notoriously volatile, influenced by geopolitical tensions, oil prices, and renewable transitions. ZWEN.TO's covered call strategy limits downside risk by locking in premiums, but it also restricts gains during bull runs. For example, if oil prices spike, the ETF's returns may lag compared to pure energy equity ETFs.

The ETF's 6.93% one-year return (as of March 2025) reflects this balance. While underperforming during energy rallies, it may outperform during corrections. Investors seeking stability in a volatile market could find this appealing.

Risks to Watch

1. Energy Sector Slump: A prolonged decline in oil/gas prices could hurt underlying holdings.
2. Policy Uncertainty: U.S. trade policies and inflationary pressures (highlighted in BMO's strategy report) could disrupt energy supply chains.
3. Premium Income Volatility: The covered call strategy's success depends on consistent option premiums, which may drop in low-volatility markets.

Investment Thesis: A Niche Income Play

ZWEN.TO is best suited for income-focused portfolios willing to accept moderate capital volatility. The 9.57% yield is compelling, especially in a low-yield environment, but investors must:
- Diversify: Pair ZWEN with non-energy assets to mitigate sector-specific risk.
- Monitor Energy Trends: Track oil prices, geopolitical events, and renewable energy adoption rates.
- Compare Costs: Forgo the covered call strategy if capital growth is prioritized, opting instead for lower-fee ETFs like VDE.

Final Take

The BMO Covered Call Energy ETF offers high, steady dividends by design, but investors should recognize its limitations. The 0.65% expense ratio and capped upside make it a niche tool for income, not growth. In a volatile energy market, its covered call structure provides ballast—but only if energy prices don't crater. For the right portfolio, ZWEN.TO could be a reliable, if imperfect, yield engine.

Consider this ETF if:
- You prioritize income and can tolerate energy-sector risks.
- You allocate a small portion (e.g., 5-10%) of your portfolio to energy exposure.

Avoid it if you seek pure growth or cannot stomach sector-specific downturns.