ZWU: A Stable Income Anchor in a High-Yield, High-Risk World

In 2025, the search for income has become a high-stakes game. With the U.S. Federal Reserve's benchmark rate hovering near 4.50% and bond yields collapsing, investors are scrambling for alternatives to traditional fixed-income assets. Enter the BMO Covered Call Utilities ETF (ZWU.TO), a product that has carved out a unique niche in the income space by combining the defensive characteristics of utilities with the income-enhancing power of options strategies. As interest rates climb and volatility persists, ZWU's $0.070 per unit distribution—equating to a 7.30% forward yield—has positioned it as a compelling option for income-focused portfolios.

The ZWU Strategy: Stability Through Diversification and Options

ZWU's appeal lies in its dual focus on defensive equities and structured income generation. The ETF holds an equal-weight portfolio of utilities, telecoms, and pipeline companies, sectors historically less sensitive to economic cycles. These holdings are then leveraged through a covered call strategy, where the ETF sells out-of-the-money call options to generate premiums. This approach not only enhances yield but also provides a layer of downside protection—a critical feature in a market where rising rates have already pressured utility valuations.

The key to ZWU's consistency is its disciplined rebalancing schedule. The portfolio is rebalanced in June and reconstituted in December, ensuring alignment with current market conditions and volatility levels. Call options are selected based on implied volatility, a metric that has surged in 2025 due to macroeconomic uncertainty. This dynamic allows ZWU to capitalize on higher option premiums, which in turn bolster its already robust yield.

A Yield That Stands Out in a Crowded Field

ZWU's 7.30% forward yield outpaces many sector-specific and broad-market covered call ETFs. For example, the BMO Canadian High Dividend Covered Call ETF (ZWC.TO) offers a 6.7% yield but carries a higher beta of 0.88, making it more volatile. Meanwhile, the JP Morgan Equity Premium Income ETF (JEPI), which focuses on S&P 500 stocks, has a lower yield of 5.8% and a higher expense ratio. ZWU's combination of high yield, low beta (0.62), and sector-specific focus makes it a standout in a landscape where investors are increasingly prioritizing downside protection.

The ETF's performance in 2025 further strengthens its case. Year-to-date, ZWU has gained 6.08%, outperforming ZWC's 3.25% and JEPI's 2.10%. This outperformance is driven by the utilities sector's resilience in a high-rate environment. Unlike cyclical sectors, utilities are often seen as "bond proxies," offering steady cash flows and regulatory-driven earnings. ZWU's covered call strategy amplifies these traits, making it a hybrid of equity growth and bond-like income.

Navigating the Risks: Declining Dividends and Rate Sensitivity

Critics may point to ZWU's declining dividend trend, with an average growth rate of -4.27% over the past three years. However, the recent stabilization at $0.07 per unit suggests a maturation of the ETF's strategy. The drop from $0.08 to $0.07 in 2023 was a necessary adjustment to align with lower interest rates and reduced option premiums. Now, with rates stabilizing and volatility persisting, ZWU's distribution appears sustainable.

That said, ZWU is not immune to rate risk. Utilities are sensitive to discount rate changes, and a further rate hike could pressure its underlying holdings. However, the covered call strategy mitigates this risk by generating income that offsets potential valuation declines. For instance, if a utility stock in ZWU's portfolio falls due to higher rates, the premium income from the call options can cushion the loss. This balance is particularly valuable in a market where traditional utilities ETFs have underperformed.

A Strategic Fit for Income-Driven Portfolios

ZWU's role in a diversified portfolio is clear. For retirees and income-focused investors, its monthly distributions provide predictable cash flow, while its low beta reduces portfolio volatility. In a rising rate environment, ZWU's defensive utilities holdings and options premiums act as a buffer against broader market declines.

Comparisons to other strategies highlight ZWU's advantages. For example, bond ladders offer similar income but lack equity upside. Dividend stocks, while reliable, are vulnerable to rate hikes and regulatory changes. ZWU bridges these gaps by offering a hybrid of income, growth, and protection.

Final Verdict: A Must-Have for Income Portfolios

In a world where income is scarce and volatility is the norm, ZWU stands out as a strategic addition to income-focused portfolios. Its 7.30% yield, low beta, and defensive sector focus make it a rare combination of income and stability. While the declining dividend trend is a cautionary note, the recent consistency at $0.07 per unit suggests a matured strategy that aligns with current market dynamics.

For investors seeking to hedge against rising rates while maintaining income, ZWU offers a compelling solution. As the ETF's year-to-date performance and sector resilience demonstrate, it is not just a yield play—it's a defensive, income-generating anchor in an uncertain market.