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Investors looking for guarantees can count on one thing these days – volatility.
“When we look at the world, there’s just a heck of a lot of uncertainty,” says Paul MacDonald, chief investment officer at Harvest ETFs in Oakville, Ontario.
That may feel unsettling, especially for those planning to retire or who’ve already entered retirement. They’re looking for steady income from their portfolios while worrying about equity market bubbles, inflation, trade wars and interest rates.
With central banks now cutting interest rates, investors are moving away from products such as guaranteed investment certificates and are increasingly seeking stable income from assets that can perform regardless of conditions. That’s driving interest toward stocks or portfolios of well-known, reliable companies, enhanced with a covered-call overlay. That provides the potential for higher yields and consistent income.
Portfolios can be diversified in several ways. Typically, that means owning investments across asset classes, geographies and sectors to manage volatility. But cash-flow generation can be diversified too, which is especially important for income-focused investors.
Dividends, bond coupons and distributions can be blended to provide this cash flow. Yet, another tried-and-true strategy involves writing covered calls on portfolio holdings to generate tax-efficient income from premiums. These are taxed efficiently as capital gains as opposed to income.
As Mr. MacDonald explains, the more volatile the markets, the better. “Covered-call option premiums are priced based on volatility, and as volatility rises, so do premiums.”
Investors and advisors have many choices among exchange-traded funds offering diversified exposure to equity and bond markets with covered-call strategies.
“That’s really where the value-add comes. You get a one-ticket solution diversified across multiple sectors and a stream of income,” Mr. MacDonald says.
Harvest ETFs is one of North America’s leading providers of ETF solutions for income generation using covered calls.
“We’re able to generate a high cash flow, albeit while giving up a little bit of the upside on the underlying investments,” he says.
Harvest ETFs’ lineup includes ETFs with highly targeted exposure, including single-stock offerings such as Harvest Eli Lilly High Income Shares ETF LLYH-T.
Harvest ETFs also has enhanced versions adding moderate leverage on up to 25 per cent. That boosts cash generation, although it does increase downside volatility, too.
Other sector-focused choices have also been popular in recent years, such as Harvest Healthcare Leaders Income ETF HHL-T. Yet, Harvest ETFs also has highly diversified high-income ETF strategies. As “funds of funds,” these are structured as one umbrella ETF holding several high-income and/or enhanced high-income ETFs.
“They provide great cash flow from covered calls and are diversified across several sectors and even asset classes,” Mr. MacDonald notes.
This lineup includes Harvest Diversified Equity Income ETF HRIF-T, Harvest Diversified Monthly Income ETF HDIF-T, Harvest Balanced Income & Growth ETF HBIG-T and Harvest Balanced Income & Growth Enhanced ETF HBIE-T.
Harvest Diversified Equity Income ETF is a portfolio of nine Harvest income ETFs, including Harvest Canadian Equity Income Leaders HLIF-T and Harvest US Bank Leaders Income ETF HUBL-T. It has a current annual yield of about 10 per cent, or a monthly cash distribution of $0.0741 per unit.
A similar ETF, Harvest Diversified Monthly Income ETF, is the enhanced version. It has the same holdings but with an additional leverage strategy, amplifying the income-generating capacity of the portfolio. By including ETFs focused on sectors such as health care, technology, utilities and U.S. banks, this ETF draws income from dividends and call option premiums across multiple industries.
“For income investors, it’s the best of both worlds in that you still get some market upside, but you’re also generating meaningful cash flow over what you can earn elsewhere,” Mr. MacDonald says.
Harvest Balanced Income & Growth ETF and its leveraged counterpart, Balanced Income & Growth Enhanced ETF, offer even greater diversification. These are portfolios of primarily Harvest income equity and fixed income ETFs.
If the best way to harness volatility and create a smoother ride is portfolio diversification, there’s an approach for just about any investor. But for investors with an income slant, Harvest ETFs’ funds are worth closer examination, Mr. MacDonald says.
“Simply, these are great if you need monthly cash flow.”
Advertising feature produced by Globe Content Studio with Harvest ETFs. The Globe’s editorial department was not involved.