What is ZPAY?

I have read some confusing and incorrect information on ZPAY on the Web. Some of this erroneous info was published here. Let us take a moment to get the truth out.

The BMO PremiumYield ETF (ZPAY), based on a mix of large, highly-capitalized, U.S. firms, uses a derivative instruments strategy to minimize volatility while increasing the yield. The bank gives ZPAY a risk rating of low to medium.

Read the BMO post HERE.

ZPAY is not a bond-based ETF.

I am running a test of ZPAY and over the coming months we all may learn whether of not there is a place for ZPAY in our portfolios.

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This post corrects the errors made in referring to ZPAY in previous posts. ZPAY is NOT based on bonds but on U.S. equities. Read the second paragraph above. I thank you for taking note of this correction.

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Almost half way through June and I have figures for my comparison test. $100,000 invested in each ETF.

• ZPAY: $1108 gain
• ZAG; $944
• XSB: $98
• XBB: $748
• XIC:$1474
• VEQT: $1735

My gut feeling is that in a severe downturn, ZPAY will lose a lot but not as much as the other equity ETFs (XIC and VEQT). It may lose more than the bonds funds but I'm hoping when the 6.5% yield is factored in, ZPAY will be very competitive with the bond-based ETFs such as XSB. I'm curious as to the outcome when pitted against XBB and ZAG. ZAG is very popular with financial advisors and experts publishing on the Internet.

In a severe downturn, if it loses less than the other equity ETFs, selling ZPAY to move into high yielding dividend paying stocks will make sense. Time will tell. Stay tuned.

ZPAY or ZAG or XSB

Recently I read about an equity-based ETF that supposedly rivalled bond-based ETFs when judged by price stability. It offered low volatility on par with bond ETFs bit with a better yield, or that was the claim. The claim was only half right. The ETF in question was ZPAY.

I compared it to ZAG and to XSB. When it comes to volatility, ZPAY did not outperform the bond ETFs. See the chart below. ZAG is in the green. ZAG is purple and XSB is blue.

Where ZPAY did shine was in the yield. The options trading approach clearly does make the yield pop.

• ZPAY yields 6.51%
• ZAG yields 3.05%
  
• XSB yields 2.33%
• XBB yields 2.88%

Compared to other equity plays, ZPAY appears to almost flatline when graphed against ETFs like XIC or VEQT. It appears ZPAY could be a good place to park some cash if the high yield makes the risk of increased volatility acceptable.

I think it is time to open Portfolio Manager and pit three popular bond ETFs against each other plus ZPAY and at the same time I will track XIC and VEQT. This will generate some hard numbers and give a partial answer to the question: Is ZPAY a reasonable alternative to bond ETFs or even cash for that matter as a place to park some cash. At the moment I use TDB8150 and I realize only .002% on my money. That yield delivers only $200 annually on a $100,000. In comparison, ZPAY would deliver $6510. So, is the yield worth taking the risk?

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BMO Aggregate Bond Index ZAG	$15.72	6,361.00	--	99,994.92CAD	-9.99CAD
BMO Premium Yield ZPAY	$29.51	3,388.00	--	99,979.88CAD	-9.99CAD
iShares Core Canadian Short Term Bond Idx XSB	$27.87	3,588.00	--	99,997.56CAD	-9.99CAD
iShares Core Canadian Universe Bond Idx XBB	$31.64	3,160.00	--	99,982.40CAD	-9.99CAD
iShares Core S&P/TSX Capped Composite Idx XIC	$31.67	3,158.00	--	100,013.86CAD	-9.99CAD
Vanguard All-Equity Portfolio VEQT	$33.80	2,958.00	--	99,980.40CAD	-9.99CAD

I do not believe one can buy a fraction of an ETF. For that reason, the starting amount varies slightly between the various ETFs being tracked. If the results are very close, keeping this record will be somewhat important. Personally, I really do not concern myself with differences as small as those above.

I back tested ZPAY against some indexes such as: TSX (purple), S&P 500 (dark blue), DJIA (orange), NASDAQ (cyan), S&P TSX Capped Financials (thin green line), S&P TSX Utilities (grey), S&P TSX REIT Index (dark red). ZPAY is heavy green line bouncing along the neutral base line.

Note how little ZPAY declined in the bear market indicated at the far left end of the graph. Do you find this interesting? Is ZPAY worth considering as a place to park some money when one has no immediate investment under consideration? In my Million Dollar Portfolio Demo, I sold some equities and transferred $30,000 into ZPAY. I may add another $25,000 to the ZPAY investment if it looks good (and at the moment, it is looking good.)