Leveraging covered calls for enhanced returns and stable monthly distributions
This article was produced in partnership with Harvest ETFs.
At the heart of Harvest ETF's success is a strategic formula that involves the utilization of covered calls—a method that has not only distinguished Harvest in the marketplace but has also positioned it as a go-to solution for anyone looking to monetize market volatility to generate monthly income.
Investments that promise very high yields certainly capture the attention of investors across Canada. However, Harvest advises a cautious approach, emphasizing the need to look beyond yield. The underlying securities, risk-return profile, past performance, and the nature of income distribution all play critical roles in the selection of investment products.
The portfolio group's commitment to generating stable monthly distributions for its investors is evident in its long history of doing just that. As one of the largest issuers of covered call writing ETFs, Harvest ETFs has developed a comprehensive suite that caters to a wide array of investor needs. With its expansion to covered-call written on US Treasury ETFs, Harvest is providing investors with innovative solutions to generate income from exposure to high-quality bonds in a tax-efficient manner. These ETFs include the Harvest Premium Yield Treasury ETF (HPYT:TSX) and the Harvest Premium Yield 7-10 Year Treasury ETF (HPYM:TSX).
Among its crowning achievements is the distinction of having the largest Healthcare ETF in Canada, the Harvest Healthcare Leaders Income ETF (HHL:TSX) with assets totaling $1.5 billion. This ETF alone has delivered over $400 million in total distributions since its inception, showcasing Harvest's ability to deliver.
Harvest ETF's approach is meticulously designed to help meet the needs of retirees, especially those requiring consistent income for RRIF withdrawals, and investors seeking passive income avenues. By focusing on covered calls, Harvest takes advantage of market volatility to generate income on top of dividends from stocks of high-quality companies. This dual-income strategy helps investors benefit from upward market movements and the inherent value of dividend-paying stocks.
Harvest ETFs has been at the forefront of introducing covered-call fixed-income ETFs in Canada, a strategy long available in the U.S. This approach involves selling covered-call options on a portion of the portfolio’s holdings of US Treasury ETFs to generate consistent monthly cash flow. This complements the income from underlying holdings, offering a strategic advantage by providing higher income potential compared to traditional bonds or bond funds.
Regardless of whether Harvest's fixed-income ETFs employ a covered call strategy, their primary aim is to produce consistent income. If your investment strategy leans towards tactical bond maneuvers for capital appreciation, these ETFs might not align with your goals. However, if your goal is to achieve a steady monthly income that outperforms what conventional bonds offer, they deserve your attention.Top of Form
Tax-efficient cash distributions
One of the most attractive aspects of Harvest's covered-call strategy is its tax efficiency. Unlike interest from coupon payments, which may be taxed as income, the premiums from the call options are taxed as capital gains. This means only 50% of this income is taxable, offering an advantage to investors seeking to maximize their after-tax returns.
Demystifying current yield with HDIF
The Harvest Diversified Monthly Income ETF (HDIF) exemplifies Harvest's income-generating capabilities. In November 2023, HDIF distributed $0.0708 per share. Annualizing this distribution ($0.0708 x 12) results in $0.8496 per share per year. When divided by the market price of $7.32 (as of November 13, 2023), this equates to a current yield of 11.61 percent. This yield is only realized if HDIF is purchased at that price.
It's important to note the impact of market price fluctuations on the current yield. If HDIF's market price falls below $7.32, the yield increases, offering even greater income potential. Conversely, a price above $7.32 would decrease the yield. However, investors are assured of the $0.0708 per unit monthly payment, providing a predictable income stream.
