Yield-focused ETFs and the Benefit They Can Provide Investors
ETFs that employ covered call-writing strategies can be effective ways to generate monthly yield for investors while still providing exposure to a security or asset class on a long-term basis.
Covered call strategies historically perform well in volatile markets, benefitting from the income generated from selling call options. However, by using this strategy, investors sacrifice some upside potential that could come from the underlying investment in exchange for the yield earned from selling calls.
This article will provide a brief overview of covered call ETFs, the benefits they provide, and investment solutions investors can consider.
How Covered Calls ETFs work
Covered Call ETFs aim to generate higher income by investing in a portfolio of stocks while writing/selling call options on a portion of the underlying securities in exchange for a fee/premium.
A call option gives the buyer the right, but not the obligation, to buy a stock at a fixed price within a specific period. The buyer pays a premium to the seller for that right. By selling call options, the portfolio can generate additional cashflows in the form of premium income, in addition to any income that may be derived through dividends. Covered call strategies are often considered defensive strategies, as the option premium reduces equity downside risk in falling markets.
Employing a covered call strategy involves a trade-off between income and growth potential. Writing options caps the upside growth potential of the portfolio that is covered in exchange for a higher yield.
Why you should consider Covered Calls ETFs
Covered call ETFs offer several benefits, such as reduced volatility and income generation. Detailed below are some of the primary benefits of covered call ETFs:
- Reduced volatility: By selling call options, the ETF can provide a potential hedge against market downturns and potentially outperform the market. This can help reduce overall portfolio volatility and smooth out returns over time.
- Income generation: Covered call ETFs are designed to generate income for investors by selling call options on the underlying stocks in the portfolio. This can provide a steady stream of income, making them a popular choice for investors looking to supplement their retirement income or generate cash flow from their investments.
- Tax efficiency: Distributions from covered call ETFs are generally composed of dividends earned on the underlying holdings and options premiums from writing covered calls, fewer fees, taxes, and expenses. From a tax perspective, covered call premiums are typically classified as capital gains or return of capital (, which are considered ‘tax efficient’ relative to interest income.
Here’s a list of Covered Call ETFs you can consider
The ETF offerings available to Canadian investors interested in covered call strategies are diverse, allowing individuals to choose from single-name covered call ETF solutions or take a sector-based approach.
In the case of the former, Purpose Investments Yield Share suite allows investors to earn an attractive monthly yield on specific companies. Presently, the suite provides investors with specific exposure to notable U.S. companies. The funds within the Purpose Investments Yield Share suite are:
Berkshire Hathaway (BRK) Yield Shares Purpose ETF (Ticker: BRKY), provides participation in the long-term growth opportunity of Berkshire Hathaway shares.
Alphabet (GOOGL) Yield Shares Purpose ETF (Ticker: YGOG), provides participation in the long-term growth opportunity of Alphabet shares.
Apple (AAPL) Yield Shares Purpose ETF (Ticker: APLY), provides participation in the long-term growth opportunity of Apple shares.
Amazon (AMZN) Yield Shares Purpose ETF (Ticker: YAMZ), provides participation in the long-term growth opportunity of Amazon shares.
Tesla (TSLA) Yield Shares Purpose ETF (Ticker: YTSL), provides participation in the long-term growth opportunity of Tesla shares.
NVIDIA (NVDA) Yield Shares Purpose ETF (Ticker: YNVD), provides participation in the long-term growth opportunity of NVIDA shares.
Microsoft (MSFT) Yield Shares Purpose ETF (Ticker: MSFY), provides participation in the long-term growth opportunity of Microsoft shares.
For covered call ETF solutions that provide broad exposure to specific market segments, Hamilton ETFs Yield Maximizer™ ETFs suite is worthy of consideration. The funds within this particular suite include:
Hamilton Canadian Financials Yield Maximizer™ ETF (Ticker: HMAX) is designed for attractive monthly income, while providing exposure to a market cap-weighted portfolio of Canadian financial services stocks.
Hamilton U.S. Bond Yield Maximizer™ ETF (Ticker: HBND) aims to deliver attractive monthly income while providing exposure primarily to U.S. treasuries through a portfolio of bond exchange-traded funds.
Hamilton Technology Yield Maximizer™ ETF (Ticker: QMAX) is designed for attractive monthly income, while providing exposure to a portfolio of primarily large-cap U.S. technology equity securities.
Hamilton U.S. Equity Yield Maximizer™ ETF (Ticker: SMAX) is designed for attractive monthly income, while providing exposure to a portfolio of primarily large-cap U.S. equity securities.
Hamilton Utilities Yield Maximizer™ ETF (Ticker: UMAX) is designed for attractive monthly income, while providing exposure to a portfolio of utility services equity securities, primarily domiciled/listed in Canada and the U.S.
Hamilton Healthcare Yield Maximizer™ ETF (Ticker: LMAX) is designed for attractive monthly income, while providing exposure to an equal-weight portfolio of primarily U.S. large-cap healthcare companies.
Hamilton U.S. Financials Yield Maximizer™ ETF (Ticker: FMAX) is designed to deliver attractive monthly income while providing exposure to an equal-weight portfolio of U.S. financial services companies.
Hamilton Energy Yield Maximizer™ ETF (Ticker: EMAX) is designed for attractive monthly income, while providing exposure to an equal-weight portfolio of primarily large-cap North American energy companies.
Hamilton Gold Producer Yield Maximizer™ ETF (Ticker: AMAX) is designed for attractive monthly income, while providing exposure to an equal-weight portfolio of primarily large-cap gold producers.
Conclusion
Covered call ETFs can be a good option for investors looking to hedge against volatility and generate income. If one is seeking to maximize yield while keeping long-term exposure to a specific market exposure, covered call ETFs are worthy of consideration for inclusion in one’s portfolio.
Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.
