ETFs · 9 min read

ZWB vs ZWC vs ZWU: Which BMO Covered Call ETF Is Best for 2026?

ZWB, ZWC, and ZWU are the three most popular covered call ETFs sold by BMO to Canadian income investors, and every year the same question comes up: which one should you actually hold. This guide breaks each fund down by holdings, distribution yield, tax treatment, and total return so you can pick the one that fits your account and your goals.

Canadian bank towers reflected in a downtown Toronto office window at sunrise

The 60-second summary

All three funds hold Canadian dividend payers and write at-the-money covered calls on roughly half of the portfolio to boost cash distributions. That mechanic is the same in every fund, so the real differences come from what sits underneath the option overlay. ZWB holds only the Big Six Canadian banks. ZWC holds about 40 large-cap Canadian dividend stocks across sectors. ZWU holds Canadian and US utilities, telecoms, and pipelines.

Every fund charges the same 0.71% management fee, distributes monthly, and gives up some upside in return for a higher headline yield. If you already own a broad Canadian equity ETF such as XIC, VCN, or ZCN, adding one of these three is a concentration decision as much as an income decision.

Side-by-side snapshot

Metric	ZWB	ZWC	ZWU
Full name	BMO Covered Call Canadian Banks ETF	BMO Canadian High Dividend Covered Call ETF	BMO Covered Call Utilities ETF
Management fee (MER)	0.71%	0.71%	0.71%
Distribution frequency	Monthly	Monthly	Monthly
Approx. distribution yield	6.5% - 7.5%	7.0% - 7.5%	7.0% - 8.0%
Number of holdings	6 banks	~40 stocks	~30 stocks
Sector mix	100% Financials	Financials, Energy, Utilities, Comms	Utilities, Telecoms, Pipelines
US exposure	0%	~0%	~40%
Covered call coverage	~50% of shares	~50% of shares	~50% of shares

How to read the yield Distribution yield is not the same as total return. A covered call ETF can print an 8% payout for years while trailing the plain-vanilla version of the same basket by 2-3% per year. Always look at total return alongside the yield.

What each fund actually holds

ZWB - just the banks

Royal Bank, TD, BMO, Scotiabank, CIBC, National Bank
Equal-ish weight across the Big Six
One sector, one country, one bet
Highest concentration risk of the three

ZWC - dividend basket

Enbridge, TC Energy, banks, utilities, BCE, Rogers, Manulife, and more
Diversified across Canadian dividend payers
Closest to a general Canadian income ETF
Best fit if you want one covered call fund and done

ZWU - regulated cash flow

Fortis, Emera, Canadian Utilities, Enbridge, TC Energy, BCE, Rogers, Telus
Adds US names like Duke Energy and Southern Co.
Rate-sensitive but very steady cash flow
Behaves more like a bond proxy than a growth fund

The overlap is worth noticing. ZWC and ZWU both hold Enbridge, TC Energy, BCE, and Telus. If you buy both, you are doubling down on Canadian pipelines and telecoms without realising it. That is one of the most common portfolio mistakes we see in the Wealth Rebalancer portfolio dashboard.

The trade-off: yield now, growth capped

A covered call is a promise to sell a stock at a set price by a set date in exchange for cash today. The cash (the option premium) is what shows up in your monthly distribution. The cost is that if the stock rallies above the strike, the fund is forced to sell into the rally and misses part of the upside.

The lag is real Over the last 5 years, ZEB (the plain BMO Equal Weight Banks ETF) has beaten ZWB on total return in every rolling 3-year window during a rising bank market. The gap has been roughly 2% per year. In flat or falling markets, ZWB often wins. So the fund shines in a sideways market and lags in a strong bull run.

Tax treatment and account fit

This is where covered call ETFs get sneaky. The monthly cash you receive is not a pure Canadian eligible dividend. It is usually a mix of eligible dividends, capital gains, and return of capital (ROC). Each piece is taxed differently, and the mix shifts every year.

Distribution component	Non-registered tax treatment	TFSA / RRSP treatment
Canadian eligible dividends	Grossed up, dividend tax credit applies	Fully sheltered
Capital gains	50% inclusion at your marginal rate	Fully sheltered
Return of capital (ROC)	Not taxed now, reduces your ACB	No impact
Foreign income (ZWU only)	Fully taxable, foreign withholding may apply	Sheltered in RRSP, 15% withholding in TFSA

TFSA works fine ZWB and ZWC are almost 100% Canadian, so holding them in a TFSA does not create foreign withholding tax leakage. ZWU has US content, so a small drag can apply inside a TFSA. Inside an RRSP the US withholding on ZWU is waived under the Canada-US tax treaty.

Which fund fits which investor?

PICK IN 30 SECONDS

Choose ZWB if you already believe in Canadian banks and want the highest single-sector income bet.
Choose ZWC if you want one covered call ETF that behaves like a diversified Canadian dividend fund.
Choose ZWU if you want defensive, rate-sensitive cash flow and are comfortable with US exposure.
Skip all three if you are more than 10 years from retirement and total return matters more than monthly income.
Blend ZWC with a growth ETF like XEQT or VFV if you want income today without giving up long-run compounding.

Common mistakes to avoid

Doubling up. Owning ZWB plus ZWC gives you 20 to 25% in the Big Six banks. That is a concentrated bet, not a diversified income sleeve.
Holding covered call ETFs alongside DRIP. The DRIP buys more of a fund that structurally caps growth. Over time you compound the drag.
Comparing yield only. A 7% payout that erodes NAV over years is not the same as a 4% payout on a fund whose price keeps climbing.
Ignoring the sector overlap. ZWC and ZWU share Enbridge, TC Energy, BCE, and Telus. Buying both stacks the same names.
Assuming ROC is free money. Return of capital lowers your adjusted cost base, which raises the capital gain (or shrinks the loss) when you eventually sell.

How to size a covered call ETF in your portfolio

For most self-directed Canadian investors, a covered call ETF is a satellite holding, not a core one. A useful ceiling is 10 to 20% of your total equity sleeve. Anything higher and you have effectively hedged away the growth engine of the portfolio.

The Wealth Rebalancer makes this concrete. Import your holdings, set a target weight for your income sleeve, and the app tells you exactly how much of ZWB, ZWC, or ZWU to buy or trim next contribution to stay on plan. Without a rebalancing discipline, covered call ETFs tend to grow into a larger slice of the portfolio than intended because their high distributions get reinvested into the same fund.

Manage your income sleeve without spreadsheets

Import your ZWB, ZWC, or ZWU position and see exactly how much of your next contribution should go where.

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Frequently asked questions

Is ZWB or ZWC a better long-term hold?

For a diversified investor, ZWC is usually the better single-fund pick because it spreads across sectors rather than concentrating in six banks. If you already have Canadian equity exposure elsewhere and want a specific tilt toward banks, ZWB works. Over the long term, both trail their non-covered-call equivalents in strong bull markets and hold up better in sideways markets.

Should I hold ZWU in a TFSA or an RRSP?

RRSP is slightly better because ZWU has about 40% US content, and the Canada-US tax treaty waives the 15% US withholding tax on dividends inside an RRSP. In a TFSA the withholding cannot be recovered. That said, the drag is small (around 0.15% per year on the US portion), so if you have room, either works.

Does the return of capital in ZWB, ZWC, and ZWU affect my taxes?

Yes, but only when you sell. Return of capital is not taxed the year you receive it. Instead, it reduces the adjusted cost base (ACB) of your units. When you eventually sell, the capital gain is larger (or the capital loss is smaller). BMO publishes the tax breakdown each year so you can update your ACB accurately in a non-registered account.

Can I combine ZWB, ZWC, and ZWU into one income portfolio?

You can, but be careful about overlap. ZWC and ZWU both hold pipelines and telecoms, so a 33/33/33 blend gives you heavy exposure to Enbridge, TC Energy, and BCE. A cleaner approach is ZWC as a core income holding, plus a small ZWU tilt if you want more defensive cash flow and are underweight utilities.

How is the distribution actually generated?

BMO writes at-the-money call options on approximately 50% of each holding. The premiums collected fund most of the monthly distribution, on top of the underlying dividends. The remaining 50% of each holding is uncovered, which is why the funds still participate in about half of any upside move.

Are there cheaper covered call ETFs than the BMO ZW series?

There are alternatives with lower MERs (Hamilton's HMAX and others sit near 0.65%), and Global X (formerly Horizons) offers HDIV and similar products that use different mechanics. The BMO ZW funds are the most established and liquid, which matters at the point of sale. For a small satellite position, the MER difference is minor compared to the total return trade-off.