Harvest Portfolios Group

An ESG Strategy for Volatile Markets | HESG

January 10, 2023

By Harvest ETFs

In Q3 of 2022 $198 billion dollars flowed out of global equity markets. In that same period, $22.5 billion of new money flowed into funds designated as ‘sustainable’ by Morningstar.

There is a strong and growing appetite among investors for investment funds built with Environmental, Social, and Governance (ESG) processes.

While the term has been politicized in the past year—along with nearly everything else—there is still momentum behind ESG investment. According to Bloomberg intelligence, global ESG assets are set to exceed $50 trillion by 2025. A study of 565 global institutional investors in 2022 commissioned by Capital Group found 89% of those investors were users or adopters of ESG strategies, up from 81% in 2021.

Even though the ‘smart money’ of institutional managers continued flowing towards ESG in 2022, that doesn’t mean the investment approach had a perfect year. In fact, market volatility through last year was particularly challenging for ESG investment funds. According to Bloomberg, the 10 largest ESG funds by assets had, by early December, posted double-digit losses. Eight of those 10 had fallen further than the S&P 500 in an overall challenging year for investors.

“Market volatility looks set to continue into 2023, so committed ESG investors may be considering strategies that are better positioned for challenging times,” said Paul MacDonald, Chief Investment Officer and Portfolio Manager at Harvest ETFs.

The Harvest ESG Equity Income Index ETF (HESG:TSX) combines an ESG process with an investment approach focused on blue-chip companies and covered call options—which can turn market volatility into monthly cash flow.

High Dividend & Covered Call Yield from an ESG ETF

HESG is a Harvest Equity Income ETF, which means it focuses on large-cap companies and employs an active & flexible covered call option strategy to generate income.

The ETF begins with a portfolio of large-cap US companies, selected based on strict financial criteria, contribution to diversification, and markers of leadership in their respective industries. These are all leading blue-chip companies with track records of profitability and performance through different economic cycles.

At the start of 2023, HESG is among the highest-yielding ESG equity ETFs currently traded on the TSX. An annualized yield of 6.61% as at January 3rd, 2023.

That high yield is generated through a combination of dividends from portfolio holdings and Harvest ETFs’ active & flexible covered call option strategy.

Put simply, Harvest ETFs’ portfolio managers generate premiums by selling call options: the option to buy a stock in 30 days’ time at today’s price. The premiums are passed on to unitholders as income.

“Covered Call Options effectively trade off some of their market growth opportunity to generate premiums,” MacDonald said. “Because HESG—like all Harvest Equity Income ETFs—uses an active covered call option strategy, it can also benefit from higher premiums generated when market volatility is elevated.”

Volatility was especially high in 2022 and Harvest’s Equity Income ETFs were able to take advantage of that. They had to trade off less growth opportunity to generate their monthly cash distributions. Those distributions were also a crucial part of the total return unitholders received in 2022, a time when return was hard to come by almost anywhere. HESG has  paid consistent monthly cash distributions since its launch in September 2022.

HESG offers a new stage in the development of ESG investments for Canadians: an equity income strategy that generates high monthly cashflow and monetizes elevated market volatility.

A volatility strategy for ESG investors

Institutions and individuals have moved towards ESG investments. Driven by investment mandates or personal values, these investors are increasingly committed to ESG as a process by which their investments can align with their values.

“The Canadian investment fund industry has, until now, largely tried to meet that demand with broad-market index funds that apply ESG screens but don’t use other sophisticated strategies,” MacDonald said. “The launch of HESG last year closed some of that gap in the market and, crucially, gave ESG-minded investors access to a strategy that is particularly effective during periods of market volatility.”

As ESG investors reflect on last-year’s portfolio performance, they may want to consider an ETF with a high yield, monthly cashflow, a blue-chip portfolio and the ability to monetize market volatility. 

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Quoted in this article

Harvest CIO Paul MacDonald, CFA

Paul MacDonald, CFA

Chief Investment Officer
Harvest ETFs

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