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Hamilton ETFs - 8 - 10% Yield

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  • May 20th, 2022 3:06 pm
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In exchange for yield, you essentially give up on the capital gains.
Your return in general compared to it's equivalent fund would see lower return overtime. The yield is created by selling a call, allowing someone to buy the stock at a specific price in the future. The problem with this is stocks can reach that price and exceed it, but since you sold a call allowing the buyer of it to buy at a set price of the stock, the fund loses out on the gain in price on the stock. Writing calls and contracts also cost money eventually eroding returns.
Say a stock is $100. You write a call to allow someone to buy it for $120 and you earn $5 for this call. If the stock stays under $120, the call is essentially free money. However if the stock goes above $120, the holder of the call likely will execute the call. So say the stock goes to $150, the fund is forced to sell the stock to the holder of the call at $120. This means even though the fund made the $5 now, in the future, the fund lost out on in this example $30 gain above the $120.
(sorry very crude example)

Ultimately, the yield is tied to promising contracts to sell a stock at a specific price. That costs money and potential gains.

If you don't actually have a need for the monthly yield (get cash to use in life, withdraw it each month etc.), there really isn't a reason to hold onto these longer term. If you are a buy and accumulate type investor, I would avoid buying these.
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Globe and Mail actually had an article about it on past Friday

"I am intrigued by the high yield of the Hamilton Enhanced Multi-Sector Covered Call ETF (HDIV-T). Is it a reliable source of income for retirees, or is it too good to be true? I would appreciate hearing about the pros and cons of this investment.
"


Based on HDIV’s most recent monthly distribution of 12.5 cents, or $1.50 on an annualized basis, the fund yields about 8.2 per cent – roughly three times the yield of the S&P/TSX Composite Index. Whenever a yield reaches into the high single digits, it’s imperative to dig deeper. In HDIV’s case – as with many similar high-yielding products – there is a lot going on behind the scenes that investors need to understand before taking the plunge.


Let’s start by looking at how HDIV is able to generate such a fat distribution. The ETF uses two main strategies, each with its own benefits and drawbacks.


First, HDIV holds a basket of seven other ETFs that employ a covered-call strategy to juice their own yields. In very basic terms, it works like this: When the underlying ETFs sell (or “write”) a call option on a stock they own (hence the term “covered”), the buyer of the option gets the right to purchase the stock from the ETF at a certain “strike” price for a specified period of time. In exchange for this privilege, the option buyer pays the ETF a “premium” that the fund can use to generate a higher distribution.

Selling call options is not a free lunch for the ETF, however. If the stock price is stable or falls, no biggie: The buyer of the option won’t exercise it and the ETF will simply pocket the premium. But if the underlying stock rises above the strike price, the option holder will call away the stock. The ETF will still keep its premium, but it won’t participate in the full upside of the share price. Generally, you can think of selling call options as a way to generate income now at the expense of capital gains later. That’s one reason why, on a total return basis, many covered-call funds lag similar ETFs that don’t use a covered-call strategy.


The second method that HDIV uses to enhance its yield – and to potentially overcome the performance drag from writing covered calls – is leverage. HDIV can borrow and invest up to an additional 25 per cent of the equity in the portfolio, which will boost the fund’s performance in a rising market. But remember that leverage cuts both ways: In a falling market, HDIV will drop more than its underlying investments. The amount of leverage here is modest, but investors still need to be mindful of the risks.


“We call 25 per cent the Goldilocks amount of leverage. It’s enough to matter, but it’s not enough, in our opinion, to fundamentally alter the risk profile of the portfolio,” Robert Wessel, managing partner and co-founder Hamilton ETFs, said in an interview.


HDIV has another key difference compared with most other covered-call ETFs: diversification. Instead of focusing on one sector, it invests across seven industries – energy, banks, utilities, insurance, health care, technology and gold mining. It does so by holding seven sector-specific covered-call ETFs from other providers – BMO Global Asset Management, CI Global Asset Management, Harvest Portfolios Group and Horizons ETFs. (Note: In February, Harvest launched a similar product, the Harvest Diversified Monthly Income ETF (HDIF-T), to compete with HDIV. Unlike HDIV, HDIF holds only other Harvest funds.)

Costs are another thing to keep in mind. HDIV has a management fee of 0.65 per cent and an estimated management expense ratio (MER) of about 0.8 per cent. But that is on top of the MERs of the underlying ETFs, which also average about 0.8 per cent. When an ETF holds other ETFs from the same company, investors only pay the one MER. But that’s not the case here.


What about performance? Well, given that HDIV has only been around for about eight months, it’s a bit early to judge. But, so far, results have been good: From its listing on July 21 through March 17, the HDIV has posted a total return of 17.5 per cent, assuming all distributions had been reinvested. That compares with a total return of about 10.2 per cent for the S&P/TSX Composite Index over the same period, also including distributions.


Evidently, the combination of a high yield and leveraged returns appeals to many investors. Helped by its strong performance, the fund now has more than $150-million of assets under management. In February, the company launched a similar ETF based on the U.S. market, the Hamilton Enhanced U.S. Covered Call ETF (HYLD-T), which has about $60-million under management.


Clearly, HDIV’s use of leverage has been a benefit during a sustained period of rising stock prices. Just remember that leverage won’t be so kind when markets hit a rough patch – as they inevitably will."

https://www.theglobeandmail.com/investi ... o-be-true/
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xgbsSS wrote: In exchange for yield, you essentially give up on the capital gains.
Your return in general compared to it's equivalent fund would see lower return overtime. The yield is created by selling a call, allowing someone to buy the stock at a specific price in the future. The problem with this is stocks can reach that price and exceed it, but since you sold a call allowing the buyer of it to buy at a set price of the stock, the fund loses out on the gain in price on the stock. Writing calls and contracts also cost money eventually eroding returns.
Say a stock is $100. You write a call to allow someone to buy it for $120 and you earn $5 for this call. If the stock stays under $120, the call is essentially free money. However if the stock goes above $120, the holder of the call likely will execute the call. So say the stock goes to $150, the fund is forced to sell the stock to the holder of the call at $120. This means even though the fund made the $5 now, in the future, the fund lost out on in this example $30 gain above the $120.
(sorry very crude example)

Ultimately, the yield is tied to promising contracts to sell a stock at a specific price. That costs money and potential gains.

If you don't actually have a need for the monthly yield (get cash to use in life, withdraw it each month etc.), there really isn't a reason to hold onto these longer term. If you are a buy and accumulate type investor, I would avoid buying these.
Ive had covered call funds for years, I use them for higher yield and cash flow as income. But im thinking of tweaking some holdings for better long term gains....

what I noticed is that so far , their bank ETF HCAL has done really well for capital gains and yield vs ZWB BMO fund....

the yield is about 1% less but gains are much better...almost 10% better in 6 months
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joepipe wrote: Ive had covered call funds for years, I use them for higher yield and cash flow as income. But im thinking of tweaking some holdings for better long term gains....

what I noticed is that so far , their bank ETF HCAL has done really well for capital gains and yield vs ZWB BMO fund....

the yield is about 1% less but gains are much better...almost 10% better in 6 months
Oranges and Apples... HCAL is leveraged AND Canadian Banks have generally outperformed (a negative for strictly Call writing ZWB as upside is called away).

Simply put, Call overlays will under perform in rising markets and "lose less" in a down trending market / sector
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joepipe wrote: Ive had covered call funds for years, I use them for higher yield and cash flow as income. But im thinking of tweaking some holdings for better long term gains....

what I noticed is that so far , their bank ETF HCAL has done really well for capital gains and yield vs ZWB BMO fund....

the yield is about 1% less but gains are much better...almost 10% better in 6 months
HCAL is not a covered call etf. It is leveraged etf fund. Essentially borrowing 25% of the asset value. It borrows from a bank to do so and clearly says it doesnt use derivatives to achieve the leverage.
https://hamiltonetfs.com/etf/hcal/
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I own both HCAL and HDIV since issuance, been pleased with both. As noted above they are completely different instruments.
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The unknown factor with these 2 new ETF (HYLD and HDIV) is the leverage applied while doing covered call.

Hamilton is very creative at getting new customer.
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I would assume that these funds would be great in a registered account for passive income and would be a great buy and hold strategy.
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admiralackbar wrote: I own both HCAL and HDIV since issuance, been pleased with both. As noted above they are completely different instruments.
Did you get your T3 for hcal yet? Any ROC?

Found my answer on their website, no ROC, most of their distribution is categorize as captain gain. This would be perfect for TFSA/RRSP.

Anyone know why HCA would have a higher eligible dividend ratio than HCAL? I thought HCAL holds HCA.
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I own a little hdiv I have been trying it out to see if I want to sell my position in fie and move it all to hdiv. Just bought it a few weeks ago
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zzricezz wrote: Did you get your T3 for hcal yet? Any ROC?

Found my answer on their website, no ROC, most of their distribution is categorize as captain gain. This would be perfect for TFSA/RRSP.

Anyone know why HCA would have a higher eligible dividend ratio than HCAL? I thought HCAL holds HCA.
HCA uses a mean reversion technique to try and improve on gains, basically selling the winners and buying the losers. It would stand to reason, the underperforming banks would have slightly higher yield.

As for whether these are good performing ETFs, only time will tell. My sense is that the covered call strategy is being abused perhaps for extra fees. Every fund company is adding a covered call overlay onto all sorts of ETFs. Surely there has to be certain sector of stocks that are more amenable to covered call overlay.
Last edited by will888 on Mar 20th, 2022 10:11 pm, edited 1 time in total.
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will888 wrote: HCA uses a mean reversion technique to try and improve on gains, basically selling the winners and buying the losers. It would stand to reason, the underperforming banks would have slightly higher yield.
I got that but hcal holds HCA, but if you look at their tax info. HCA would have a higher eligible dividend ratio to capital gain vs HCAL.
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zzricezz wrote: I got that but hcal holds HCA, but if you look at their tax info. HCA would have a higher eligible dividend ratio to capital gain vs HCAL.

Screenshot_20220320-221038_Chrome.jpg
Sorry I misread your question. You are right, it doesn't make sense.
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nathand wrote: I would assume that these funds would be great in a registered account for passive income and would be a great buy and hold strategy.
No.

I would recommend non-registered.

The reason is in a leverage situation like this, tax efficiencies are only realized in non-registered. If you are saving long term in a registered account, you are really not benefiting from the income. Perhaps you could use it In a TFSA at retirement to derive income, but it is higher risk and you risk equity degradation.
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Don't want to sound too negative on Covered calls. As long as everyone understands the dividend isn't the goal don't expect huge appreciation.

I did dip my toe into HYLD.TO For CAD and HYLD.U for US cash.

Don't forget there are advantages and ways to take advantage of these especially in down / sideways markets.
In the case of HYLD its holding a lot of covered calls etfs itself (for those too lazy to open the links above). Also YIELD is 10.33%.

Holding this in a stock broker with free trading like Wealth Simple Trade and or National Bank could generate income to rebuy/ average down in other stocks etc. I would suggest better than cash (though there is always risk).
It hasn't moved a lot in its short time span its existed.

Holding HYLD.U in a TFSA is a nice way to generate USD income without having the 15% withholding tax taken off as well. Some of its holdings QYLD, RYLD, XYLD are great income earners but the 15% "haircut" is quite frustrating for Canadians.
Its a great way to avoid that as the fund itself takes the hit and the distribution is after the withholding tax that they pay not us.

I wouldn't go all in, but its not a bad way to generate income in either CAD/ USD for various reasons.
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zzricezz wrote:
Did you get your T3 for hcal yet? Any ROC?

Found my answer on their website, no ROC, most of their distribution is categorize as captain gain. This would be perfect for TFSA/RRSP.

Anyone know why HCA would have a higher eligible dividend ratio than HCAL? I thought HCAL holds HCA.
It's because it borrows 25% of value to buy stock. The thing is based on the rules the fund sets where it has to rebalance the leverage within 2 business days if it falls below 23% or above 27%, it has to keep borrowing to buy or sell and then realizes gaIns. Additionally with the run up of bank shares in 2021, Hamilton likely realized a ton of capital gains which was then distributed as the special distribution in January.

Best is to read the prospectus, annual and interim reports on the funds. Also refer to this notice:
https://hamiltonetfs.com/hamilton-etfs- ... ributions/
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joepipe wrote: Ive had covered call funds for years, I use them for higher yield and cash flow as income. But im thinking of tweaking some holdings for better long term gains....

what I noticed is that so far , their bank ETF HCAL has done really well for capital gains and yield vs ZWB BMO fund....

the yield is about 1% less but gains are much better...almost 10% better in 6 months
That's expected. And yes, unwinding those covered call funds is probably a good thing and will probably benefit you from a tax perspective as well.

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