Editorial Note: Asset allocation ETFs have made building and maintaining a globally diversified portfoio easy. However, one of the things that they have not automated is getting money out of your portfolio. That task rears its head during drawdown years, particularly for those of us without pensions that must use their portfolio. It is psychologically harder to flip the switch from buying to selling than most people realize. BMO ETFs have addressed that cash flow generation aspect with their T-series ETFs. Investors have always been attracted to the inuitive nature of income which has made dividend investing and more complex products like covered call ETFs popular. The T-series of the asset allocation ETFs (ZEQT.T ZGRO.T ZBAL.T) add cash flow automation of distributions in a tax efficient way with the advantages of an asset allocation ETF.
This is a paid sponsor post. You will see relatively few of these on The Loonie Doctor because my mission is this site’s priority. Sponsored posts must align with that, and the sponsor provides a service or product that I would use myself or recommend to a family member. One that I like. I retain editorial control, and the articles are written with education as the primary objective. It is a win-win because you get deep, industry-expert content, vetted by me. You can read more about why I decided to collaborate with BMO ETFs as a sponsor, but I think you’ll get it after reading this post.
Targeting Cash Flow
Traditional sources of portfolio income can fluctuate, making it more challenging to plan for ongoing cash flow needs. Target cash flow units are designed to address this by providing a more regular monthly distribution, typically in the range of ~6–15% annually.
This approach can be thought of as the counterpart to dollar-cost averaging. While dollar-cost averaging supports accumulation through regular contributions, Target cash flow units are designed for decumulation—delivering a regular stream of cash flow to help fund investor spending needs.
Importantly, Target Cash Flow is not intended to maximize yield. It is a distribution strategy focused on regular monthly payments, rather than income optimization at the expense of total return.
BMO has implemented this feature within existing ETF strategies, allowing investors to choose between traditional distribution schedules or a targeted cash flow stream. These units are identified by a “.T” suffix (e.g., ZWB.T, ZWT.T).
What Are Target Cash Flow Units?
Target cash flow units aim to provide regular monthly distributions based on a predefined annual target rate (approximately 6%–15%, depending on the ETF).
This differs from traditional ETFs, where distributions are typically tied to net taxable income—such as dividends, interest, and realized capital gains—which will vary from year to year.
For investors relying on their portfolio for income, variability in distributions can make financial planning more difficult. Target cash flow units are designed to help investors better align portfolio cash flow with their monthly expenses.
How Do They Work?
The underlying investment strategy remains unchanged. The key difference lies in how distributions are determined:
| Traditional ETF | Target Cash Flow Units |
| Typically distributes its net taxable income for the year, such as dividends, interest, and realized capital gains. | Aims to pay out a fixed amount regardless of market conditions. |
The distinction is important because net taxable income is not the same as a fund’s total return.
Imagine Tony owns a house worth $1 million at the beginning of the year. Over the year, he collects $50K of rental income, net of expenses. By year-end, the value of the house has appreciated to $1.1 million.
Tony generated $50K of net taxable income from the house, but his total return was $150K.
Traditional ETFs typically distribute their net taxable income for the year—such as dividends, interest, and realized capital gains—much like Tony’s $50K of net taxable income from his rental property. As a result, distributions can fluctuate from year to year.
Now assume Tony needs $90K annually to cover his other life expenses. He needs more than the rental income his property generated, and he needs it to be more regular.
Target Cash Flow Units aim to provide that consistency by paying a predefined distribution rather than limiting distributions to the portfolio’s net taxable income for the year. In addition to paying out the income from dividends and interest, it tops that up with money from the invested capital.
What If Distributions Exceed Net Taxable Income?
The difference will come from unrealized gains—like Tony’s $100K increase in the value of his house—which contributed to his total return but was not realized in taxable form during the year. When a fund distributes amounts beyond its net taxable income for the year, that portion of the distribution is typically classified as Return of Capital (ROC) for tax purposes.
ROC is a tax classification, not a measure of fund performance. Net taxable income reflects what was taxable for the year, while total return reflects the fund’s broader economic gain, including unrealized capital appreciation. Because those are not the same thing, a fund can have positive total return even when part of its distribution is classified as ROC.
ROC does not create an immediate tax liability. Instead, it reduces the investor’s Adjusted Cost Base (ACB), which can affect taxes when the investment is eventually sold. If there is a capital gain, it defers the tax due on that into the future despite accessing money now.
For Target Cash Flow Units, ROC can be a component of the distribution because the predefined payout may at times exceed the portfolio’s net taxable income.
Does ROC Mean the Fund Didn’t Make Money?
ROC does not mean the fund had poor performance or that investors are simply getting their own capital back. A fund can have positive total return and still pay a distribution that is classified partly as ROC if some of that return was not realized in taxable form during the year.
The more important question is not whether a distribution includes ROC, but whether the distribution is supported by the fund’s total return. If total return exceeds the payout over time, the distribution may be sustainable. If it does not, the fund may gradually erode NAV.
Considerations
The dollar amount of the monthly distribution that investors will receive is reset at the beginning of each calendar year. The dollar amount is a factor of the annualized distribution rate for the Target Cash Flow Units (which is the rate set out in the individual BMO ETF profiles in the simplified prospectus of the BMO ETFs), the net asset value (NAV) per unit as of the end of the previous calendar year, and the number of Target Cash Flow Units of the BMO ETF held at the time of the distribution.
The target distribution rate may be higher than the rate of return or the portfolio yield of the BMO ETF and, hence, the monthly distribution may comprise, in whole or in part, a return of capital (“ROC”). As a result, if investors elect to receive some or all of the regular monthly distributions in cash, the value of their investment in the BMO ETF may decline over time. This is called capital depletion risk and should be understood by investors. [Loonie Doctor Note: This is the same if you withdraw and spend money from your portofolio. If you were reinvesting the distributions, then your investment value would be unchanged minus any tax on the distribution. You would have more ETF units with a lower price per unit].
BMO Target Cash Flow ETFs
BMO offers Target Cash Flow Units (“.T” series) across a range of existing strategies, including:
- Asset allocation ETFs (balanced and equity-focused)
- Covered call strategies
The investment process remains the same across both parent ETF and its Target Cash Flow Units—the only difference is the distribution structure.
Who Is This Designed For?
Target cash flow units may be suitable for investors seeking to fund ongoing expenses from their portfolio and who value a more regular monthly income stream.
These structures may also reduce the need to sell investments periodically to generate cash flow. That may be both more convenient, and defer capital gains tax (depending on the circumstances).
The Bottom Line
Target cash flow units are designed to enhance distribution predictability while maintaining the underlying investment strategy.
As with any income-oriented solution, sustainability depends on total return over time. BMO’s “.T” series provides flexibility by allowing investors to choose between a traditional or targeted cash flow approach within the same ETF.
For investors in the drawdown phase, these solutions can support a more structured approach to generating portfolio income.
ETF Market Insights Video
ETF Historical Performance & Disclaimer
Historical Performance
| Fund name | Ticker | 1 Y | 2 Y | 3 Y | 5 Y | 10 Y | Since Inception | Inception date |
| BMO Covered Call Canadian Banks ETF CAD | ZWB | 45.20% | 35.17% | 29.13% | 15.27% | 12.50% | 11.27% | 1/28/2011 |
| BMO Canadian High Dividend Covered Call ETF CAD | ZWC | 25.96% | 20.30% | 18.62% | 11.54% | — | 8.56% | 2/3/2017 |
| BMO Covered Call Utilities ETF CAD | ZWU | 8.27% | 10.32% | 11.57% | 5.22% | 5.52% | 5.29% | 10/20/2011 |
| BMO US High Dividend Covered Call ETF CAD | ZWH | 16.52% | 11.72% | 12.61% | 9.48% | 9.29% | 11.02% | 2/10/2014 |
| BMO Europe High Dividend Covered Call ETF CAD | ZWP | 15.46% | 13.13% | 14.47% | 10.66% | — | 7.82% | 3/2/2018 |
| BMO All-Equity ETF CAD | ZEQT | 24.90% | 21.87% | 21.80% | — | — | 15.22% | 1/24/2022 |
| BMO Europe High Dividend Covered Call Hedged to CAD ETF CAD | ZWE | 15.28% | 9.44% | 11.37% | 9.37% | 8.34% | 8.15% | 9/2/2015 |
| BMO Covered Call US Banks ETF CAD | ZWK | 20.27% | 20.89% | 27.06% | 6.44% | — | 7.49% | 2/12/2019 |
| BMO Global High Dividend Covered Call ETF CAD | ZWG | 20.78% | 15.18% | 15.56% | 10.65% | — | 10.24% | 1/16/2020 |
| BMO Covered Call Dow Jones Industrial Average Hedged to CAD ETF CAD | ZWA | 13.27% | 10.35% | 12.32% | 7.18% | 9.78% | 10.06% | 10/20/2011 |
| BMO Covered Call Technology ETF CAD | ZWT | 26.00% | 26.64% | 29.92% | 18.74% | — | 20.71% | 1/20/2021 |
| BMO Covered Call Energy ETF CAD | ZWEN | 42.96% | 22.83% | 18.53% | — | — | 15.81% | 1/23/2023 |
| BMO US High Dividend Covered Call Hedged to CAD ETFCAD | ZWS | 13.45% | 8.37% | 10.07% | 6.24% | — | 7.41% | 3/2/2018 |
| BMO Conservative ETF CAD | ZCON | 10.15% | 9.46% | 10.61% | 5.07% | — | 6.44% | 2/12/2019 |
| BMO Global Enhanced Income Fund (ETF Series) CAD | ZWQT | 23.57% | 16.52% | 16.72% | — | — | 17.03% | 6/21/2023 |
| BMO Growth ETF (Target Cash Flow Units) | ZGRO.T | 19.84% | 17.69% | 18.05% | — | — | 16.31% | 1/23/2023 |
| BMO Balanced ETF (Target Cash Flow Units) | ZBAL.T | 14.93% | 13.51% | 14.30% | — | — | 9.17% | 1/24/2022 |
Disclaimer
This content is sponsored by BMO ETFs.
This content is intended for information purposes only. Loonie Doctor is compensated under this arrangement by BMO Global Asset Management. The views expressed herein are subject to change without notice. The content contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Any securities described herein must be evaluated relative to the individual’s investment objectives and risk profile, and professional advice should be obtained with respect to the individual’s particular circumstances.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent prospectus.
Commissions, management fees and expenses all may be associated with investments in exchange-traded funds. Please read the ETF Facts or prospectus of the BMO ETFs before investing. Exchange-traded funds are not guaranteed, their values change frequently and past performance may not be repeated.
The Target Cash Flow Units are subject to capital depletion risk. Target Cash Flow Units make monthly distributions of a fixed amount which may comprise, in whole or in part, a return of capital (“ROC”). A ROC reduces the amount of an original investment and may result in the return to investors of the entire amount of an original investment. A ROC that is not reinvested will reduce the NAV of the BMO ETF, which could reduce the BMO ETF’s ability to generate future income. Investors should not draw any conclusions about the BMO ETF’s investment performance from the amount of this distribution. A ROC can only be made by a series of a BMO ETF to the extent that there is a positive balance in the capital account for the relevant series. To the extent that the balance in the capital account becomes, or is at risk of becoming, zero, monthly distributions may be reduced or discontinued without prior notice.
The dollar amount of the monthly distribution that you will receive is reset at the beginning of each calendar year. The dollar amount is a factor of the annualized distribution rate for the Target Cash Flow Units (which is the rate set out in the individual BMO ETF profiles in the simplified prospectus of the BMO ETFs), the the net asset value per unit of a series of a BMO ETF (NAVPS) as of the end of the previous calendar year, and the number of Target Cash Flow Units of the BMO ETF held at the time of the distribution. Although not expected, we may also adjust the monthly distribution during the year, if capital market conditions have significantly affected the ability of the BMO ETF to maintain the applicable distribution. If we make any such adjustment to the monthly distribution, we will issue a press release to communicate the change. The distribution rate applicable to the Target Cash Flow Units may be higher than the rate of return or the portfolio yield of the BMO ETF that offers such Units. As a result, if you elect to receive some or all of the regular monthly distributions in cash, the value of your investment in the BMO ETF may decline over time.
Distributions from Target Cash Flow Units will include a ROC. A ROC does not necessarily reflect the BMO ETF’s investment performance and should not be confused with “yield” or “income”. Investors should not draw any conclusions about the BMO ETF’s investment performance from the amount of these distributions. A ROC does not create an immediate tax liability, but it reduces investors’ Adjusted Cost Base (ACB) over time; this may affect taxes when the investment is sold. Investors should consult a tax advisor.
Although not expected, if capital market conditions have significantly affected the ability of the BMO ETF to maintain the applicable distribution the monthly distribution may be adjusted during the year.
For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the ETF facts or prospectus. BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO ETFs are managed by BMO Asset Management Inc., an investment fund manager, a portfolio manager, and a separate legal entity from Bank of Montreal.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
“BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under licence.
Can you convert to these units when it comes time to decumulate without selling and incurring a capital gain in a taxable account?
For example if you own ZEQT, can you ask the brokerage or BMO to convert it to ZEQT.TO in kind?
Hey Bobby,
That is the missing link. You would have to sell one to buy the other. In an RRSP or TFSA that doesn’t matter since no tax. In a taxable account, one option would be to start building it earlier and reinvest the distributions (keeping it invested). With all of the free trade brokerages, it would be reasonable.
A cool option would be if BMO were to make a mutual fund that mimics ZEQT ZGRO and ZBAL with the same strategy and low fees. They could have a T-series and mutual funds with identical holdings can move between series without selling.
-LD