By Ambrose O’Callaghan
Whatever markets are doing, income-focused investors and advisors are asking the same question: How do you turn a portfolio into consistent income without giving up all the upside?
Rising stock prices alone do not cover the bills for many investors. Dividends are helpful as well, but what if investments can generate income beyond the dividends paid by the companies they hold?
That is the idea behind Harvest Premium Yield ETFs. Through actively managed option strategies, these ETFs sell calls and puts to collect option premiums alongside income from their underlying investments.
The Premium Yield lineup includes the Harvest Premium Yield Canadian Bank ETF (TSX: HPYB), the Harvest Premium Yield Enhanced ETF (TSX: HPYE), and the Harvest Premium Yield Gold ETF (TSX: HPYG).
Each Premium Yield ETF applies an active options strategy to its respective underlying portfolio, giving investors distinct ways to pursue income and growth potential.
Here are three things to know about Harvest Premium Yield ETFs:
1. A different distribution schedule (HPYB & HPYE)
The first thing to understand is how often Harvest Premium Yield ETFs distribute income.
HPYB and HPYE are designed to pay cash distributions twice per month, while HPYG pays monthly. For investors managing ongoing expenses, more frequent distributions can provide additional flexibility when planning cash flow.
Retirees might also benefit from receiving distributions at different points throughout the month, helping to align investment income with recurring expenses. Other investors may appreciate having more frequent access to cash without needing to sell ETF units to fund every withdrawal.
However, distribution frequency is only one part of the equation. Receiving payments twice a month rather than once does not, by itself, increase the total return an investment generates. Distributions can also include a return of capital, and the amount distributed is not guaranteed.
The more important question is how each ETF seeks to generate the income it distributes.
2. How the Premium Yield option writing strategy
Harvest Premium Yield ETFs use an actively managed strategy built around covered calls and written puts. These options allow the ETFs to collect premiums while dynamically adjusting their exposure to the underlying investments.
Here is how this strategy works:
Covered calls
The Portfolio Manager sells call options on securities owned within the ETF, receiving premiums in exchange for giving the option buyer the right to purchase those securities at a predetermined price. If the securities rise above that price, the ETF may have to sell them at the agreed price and potentially forgo some market appreciation.
Written puts
The Portfolio Manager sells put options, collecting a premium in exchange for taking on the obligation to buy securities at a predetermined price if the options are assigned. This can allow the strategy to establish or increase exposure at specified prices, but it also creates downside risk if the securities depreciate significantly.
The Harvest Premium Yield strategy actively adjusts between these strategies as market conditions change. During rising markets, covered calls can generate premiums while allowing the ETF to participate in some equity appreciation. If calls are assigned, the portfolio can shift toward written puts, which can generate additional premiums while establishing potential entry points for the underlying securities. If puts are assigned during a market decline, the ETF can acquire securities at the predetermined prices and adjust its options positioning accordingly.
This approach is designed to generate income from changing market conditions rather than relying exclusively on dividends or the direction of stock prices.
3. Similar strategy – Different exposures
HPYB | Canada’s Big Six Banks
The Harvest Premium Yield Canadian Bank ETF (TSX: HPYB) holds an equal-weighted portfolio of Canada’s six largest banks: Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal, Scotiabank, Canadian Imperial Bank of Commerce, and National Bank of Canada.
Canada’s major banks occupy an important position in the domestic economy. Their operations span personal and commercial lending, wealth management, capital markets, and other financial services. Their established businesses and dividend history have made them a staple for Canadian equity investors.
HPYE | Leading U.S. Equities
The Harvest Premium Yield Enhanced ETF (TSX: HPYE) applies the Premium Yield strategy to a portfolio of 20 leading U.S. companies. The portfolio provides access to a range of major industries, including technology, financial services, consumer businesses, and energy. These companies offer access to established businesses and important growth themes in the U.S. equity market.
HPYG | Gold bullion and gold equities
The Harvest Premium Yield Gold ETF (TSX: HPYG) takes a different approach, combining gold bullion exposure with leading gold equities in one ETF.
Gold bullion and gold-mining stocks provide distinct forms of exposure to the precious metal. Bullion offers direct exposure to movements in the price of gold. Meanwhile, mining companies introduce additional businesses and operating risks. When gold prices rise, miners may benefit from higher realized selling prices relative to their production costs, potentially amplifying their earnings and share-price movements.
How might investors use premium yield ETFs?
There are several potential applications worth considering for Harvest Premium Yield ETFs.
Cash-flow planning
For retirees and other income-focused investors, regular distributions can help support spending needs. HPYB and HPYE’s twice-monthly schedules may provide additional flexibility. Meanwhile, HPYG offers monthly distributions.
Registered accounts
HPYB, HPYE, and HPYG are eligible for registered accounts including RRSPs, RRIFs, TFSAs, RESPs, and FHSAs. Account eligibility does not mean every strategy will be appropriate for every investor, and the tax treatment of distributions can vary.
Adding an income strategy to existing exposure
Consider an investor who holds gold bullion in a TFSA. Bullion itself does not generate income. HPYG offers a different approach by combining gold bullion exposure with gold equities and an active options strategy designed to generate monthly cash distributions. Similarly, an investor seeking exposure to Canada’s major banks could consider whether HPYB offers an appropriate alternative to a conventional equity holding.
Asking the right questions
A headline distribution rate tells you what an ETF is distributing. However, it does not tell you whether the ETF belongs in your portfolio.
The Harvest Premium Yield ETF suite offers three distinct approaches: Canadian bank exposure through HPYB, U.S. equities through HPYE, and gold bullion and gold equities through HPYG. Each combines its underlying investments with an actively managed options strategy designed to generate income.
Disclaimer
The content of this article is provided for informational purposes only and should not be construed as investment advice.
Commissions, management fees and expenses all may be associated with investing in Harvest Exchange Traded Funds managed by Harvest Portfolios Group Inc. (the “Funds” or a “Fund”). Please read the relevant prospectus before investing. The Funds are not guaranteed, their values change frequently, and past performance may not be repeated. Tax investment and all other decisions should be made with guidance from a qualified professional.
Distributions are paid to you in cash unless you request, pursuant to your participation in a distribution reinvestment plan, that they be reinvested into Class A units of the Fund. If a Fund earns less than the amounts distributed, the difference is a return of capital.
The Fund is categorized as a liquid alternative ETF. This means it has the ability to use leverage and can invest more than 10% of its assets in a single issuer. The Fund employs modest leverage, which can amplify both gains and losses.
Certain statements included in this communication constitute forward-looking statements (“FLS”, including, but not limited to, those identified by the expressions “expect”, “intend”, “will” and similar expressions to the extent they relate to the Funds. The FLS are not historical facts but reflect the Harvest’s and the portfolio manager of the Funds current expectations regarding future results or events. These FLS are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. Although Harvest and the portfolio manager of the Funds believe that the assumptions inherent in the FLS are reasonable, FLS are not guarantees of future performance and, accordingly, readers are cautioned not to place undue reliance on such statements due to the inherent uncertainty therein. The Funds, Harvest and the portfolio manager of the Funds undertake no obligation to update publicly or otherwise revise any FLS or information whether as a result of new information, future events or other such factors which affect this information, except as required by law.
