The BMO Canadian High Dividend Covered Call ETF (TSX:ZWC) and SPDR Gold Trust (NYSEARCA:GLD) could be the top inflation fighters in 2022.
Published by, Joey Frennett
Published January 12, 2022
Image credit: Getty Images
There is no doubt that it is difficult to beat such high inflation levels, but it is possible. Most notably, high-yield stocks with reasonable multiples are an interesting hiding place. That said, retirees should not feel the need to significantly increase their risk tolerance. In this article, we’ll look at two passive options to diversify one’s portfolio into fairly conservative investments that can provide some protection against broader market volatility, while passive income can help one stay ahead of inflation, or at least minimize the blow.
I don’t know where inflation is going this year. Can it reach the top? Sure, but it could also persist, especially if Omicron or some other worrying COVID variant causes the Fed to take a step back and be dovish. However, hyperinflation is unlikely. So, don’t feel the need to panic. Instead, stick to generous dividends or distributions for the time you invest in stocks or funds.
In this article, we’ll look at the BMO Canada High Dividend Covered Call ETF (TSX:ZWC) and the SPDR Gold Trust (NYSEARCA:GLD) – two approaches that can put your portfolio on the defensive once inflation is poised to explode again in 2022.
ZWC
ZWC is arguably one of the most interesting retiree-friendly options in the ETF space today. It offers a jaw-dropping 6.3% yield when it comes to writing. Yes, it is a secure payment. The fund aims to have not only high yielders, but also high yielders with security and growth dividends. In addition, value traps with sky-high payouts are excluded. ETFs are a good blend of Canadian large-cap stocks that we all know and love, across a wide range of industries. Financials, energy (especially pipelines), and telecommunications accounted for a significant share.
Although the 0.72% MER is a bit on the high side for an ETF, I think the fee is worth it because management is also writing covered calls for the name the fund has. By doing so, the fund is able to pay a larger distribution from the premium income obtained through such options. Still, overlay calls aren’t a free lunch either. Premium income comes at the expense of rising capital. The higher cost reflects the additional labor involved in writing such a coverage call. For retirees, the trade-off is worth it. Heck, given the downturn expectations for 2022 and the downside risks ahead, the trade-off is worth it for any investor.
In a volatile environment, ZWC is an excellent way to capture transaction value and high yields.
GLD
Finally, we have GLD, which is one of the most popular ways to get an idea of the spot price of gold. In fact, ETFs like gold and GLD are much less volatile than the broader market and gold miners, making them an interesting option for retirees who want to fight persistent inflation. GLD is an ETF in the United States, which I prefer over the Canadian one, mainly because it is more liquid and the 0.4% MER is very reasonable.
As inflation soars, gold may shine again. In fact, 2022 could be the year when gold really shines. Although miners may have more upside, I think retirees can sleep more comfortably at night knowing that the games they are participating in have a greater impact on the spot price of goods. In fact, leverage goes both ways! When it’s safe to do so, it’s best to use assets with less volatility in case your prediction doesn’t meet your expectations. In any case, after a year of weak performance, gold is a good inflation fighter at a compelling entry point.