Generating income that outpaces inflation is a going concern for advisors and investors. Many have been finding that task more difficult to achieve amid falling yields from fixed income and dividend-producing equities in the past few years.
Increasingly, they have gravitated to exchange-traded funds (ETFs) that use a covered call to provide an all-season solution to generating income. This approach has historically provided distribution yields that are more than inflation, and paid regular and consistent distributions of cash.
“Notably, these ETFs allow investors to take advantage of market volatility using option overlay strategies,” says Chris Heakes, senior portfolio manager at Harvest ETFs in Oakville, Ont.
“That’s in contrast to traditional fixed income and equity strategies, which are typically affected negatively by high volatility.”
Harvest ETFs has established a reputation for delivering consistently high monthly distributions, often double that of dividends, through its suite of covered-call ETFs. It does so while enabling investors to participate in some modest equity market upside.
Although this approach has proven effective, Harvest ETFs is again pushing innovation in this space to provide investors with more ways to generate high regular income.
Harvest Premium Yield Canadian Bank ETF HPYB-T and Harvest Premium Yield Enhanced ETF HPYE-T, which launched in January, are innovative new entries in Canada’s ETF marketplace.
What makes these ETFs unique is that they’re using both covered-call and put strategies to generate additional income. This approach aims to offer investors the opportunity to earn high distributions while participating in the market’s upside. The strategy allows the manager to buy a stock when its price is low and sell it when its price is high if the option contract is assigned.
At the same time, the new ETFs offer investors stock market exposure with the underlying holdings comprising of some of Harvest ETFs’ leading equity tactics.
“For example, HYPE offers exposure to 20 stock positions that are the best of our discretionary equity strategies,” Mr. Heakes says.
The new fund takes the best equity ideas from existing Harvest ETFs, such as Harvest Brand Leaders Plus Income ETF HBF-T. With HYPE, investors get exposure to many of the most successful companies trading on the U.S. market, such as Apple Inc. AAPL-Q.
Harvest ETFs’ management team actively writes covered calls and puts on each holding, seeking to generate income and identify more attractive levels to buy and sell. As well, the fund managers can apply moderate leverage on the overall portfolio for additional income and growth opportunities.
HPYB uses the same strategies while providing equity exposure to Canada’s six largest financial institutions.
Each new ETF involves a significant amount of active management to apply the options tactically, depending on market conditions, while remaining competitive from a management fee standpoint.
Beyond the Harvest ETFs team’s focus on equity fundamentals, their combination of leverage, call and put options premiums, dividends and capital gains aims to generate higher yields.
The strategy does limit upside in fast-rising equity markets because of some positions being called away. Yet, active management also allows the funds’ managers to buy into positions afterward at lower prices, Mr. Heakes says. “Similarly with puts, if Amazon sells off, we will look to buy the stock at a lower price.”
Designed for investors seeking to diversify income streams in their portfolio, HYPE and HPYB provide twice-monthly distributions, one at mid-month and the other at month-end. The ETFs will also be attractive to long-term growth investors seeking a powerful hybrid of growth and income through a distribution reinvestment program.
To Mr. Heakes, the new premium yield ETFs should appeal to a wide range of investors, especially if markets remain highly volatile as that generally increases the tax-efficient premiums earned from the options strategies.
“These funds represent an evolution in assisting investors navigate complex market conditions,” he says.
Advertising feature produced by Globe Content Studio with Harvest ETFs. The Globe’s editorial department was not involved.