An Innovation in Passive Income Investing: Balanced Covered Call ETFs


April 30, 2024
By Ambrose O’Callaghan

The cost of living has increased substantially in Canada since the beginning of this decade. Indeed, many Canadians have adjusted their spending habits to cope with inflation and rising interest rates in recent years. Canadians who are struggling in these areas may seek to establish a passive income stream to mitigate the impact of rising costs in all areas of their life.

Today, we’re going to look at an exchange-traded fund (ETF) that has sought to blend a traditional asset allocation model with an innovative covered call option strategy. The combination of these strategies has resulted in a product that is able to deliver stability, growth opportunities, and high monthly cash distributions.

Traditional portfolios are making a comeback

As we’d discussed in a previous piece, the number of mutual fund assets in Canada totalled $2.012 trillion at the end of February 2024. This is according to data from the Investment Funds Institute of Canada (IFIC). Balanced mutual funds, the largest asset class, grew from $898 billion in February 2023 to $923 billion in February 2024. This demonstrates that there is still an appetite for balanced portfolios in the current environment.

Unsurprisingly, ETF assets continued to reach new heights. The ETF asset class surpassed the $400 billion mark for the first time in its history in February 2024. However, the balanced asset class remains small compared to Equity and Bond ETFs – which were valued at $250 billion and $94.8 billion, respectively, in IFIC’s most recent report.

The period of historically low interest rates came to a screeching halt as the US Fed and its central bank peers around the world responded to soaring inflation in 2022. With that, the fixed income asset class experienced new life.

In this environment, the traditional asset allocation of 60% equities and 40% fixed income/bonds should not be ignored. On the contrary, a return to normalcy in the interest rate arena means that the balanced long-term strategy could provide value to investors going forward. Fixed income investment vehicles have provided a more attractive rate of return as interest rates have climbed. Now, with the hiking cycle coming to an end, a period of declining interest rates could benefit balanced asset allocation as the traditional relationship between equities and bonds returns.

The Smart Balance: What you get with this passive income innovation

On April 15, 2024, Harvest ETFs announced the launch of the Harvest Balanced Income & Growth ETF (HBIG:TSX). This ETF is built to deliver high monthly cash distributions and the opportunity for capital appreciation. How does it achieve this?

HBIG invests in a portfolio of ETFs that are listed on a recognized North American stock exchange that provide exposure towards large-cap equity securities, and investment grade bonds or money market instrument issued by corporations or governments. Above all it will primarily include ETFs that engage in covered call strategy.

The equity portion of HBIG includes proven Harvest ETFs like the Harvest Healthcare Leaders Income ETF (HHL:TSX). This ETF has been listed on the TSX for nearly a decade. Since then, it has paid out over $400 million in monthly distributions to its unitholders.

HBIG also contains the Harvest Tech Achievers Growth & Income ETF (HTA:TSX), an ETF that holds dominant players in the exciting technology sector. In addition to providing exposure to exciting sub-sectors like Semiconductors and artificial intelligence, HTA employs an active covered call strategy to deliver consistent monthly cash distributions. It last paid out a monthly distribution of $0.1200 per unit. That represents a current yield of 8.17% as at April 16, 2024.

The fixed income portion includes the Harvest Premium Yield Treasury ETF (HPYT:TSX) and the Harvest Premium Yield 7-10 Year Treasury ETF (HPYM:TSX). These contain a portfolio of ETFs which hold longer dated and intermediate dated US Treasury bonds that are secured by the full faith and credit of the US government. The ETFs employ up to 100% covered call writing to generate a higher yield and maximize monthly cash flows.

HPYT has delivered a monthly cash distribution of $0.1500 per unit since its inception in September 2023. Meanwhile, HPYM has provided a monthly distribution of $0.0800 per unit since it debuted in January 2024.

HBIG: A balanced option for passive income investors

The strength of HBIG lies in its exposure to these equity income ETFs and fixed income ETFs, which have consistently provided high monthly cash distributions to unitholders. HBIG recently announced first distribution of $0.1600 per Class A Unit on or about May 9, 2024.

Passive income investors who are looking for even more cash flows may want to consider the Harvest Balanced Income & Growth Enhanced ETF (HBIE:TSX). This ETF is built to deliver enhanced income and growth opportunities by applying modest leverage to an investment portfolio that seeks to replicate HBIG. On April 15, Harvest announced that HBIE would post a distribution of $0.2000 per unit on or about May 9, 2024.

HBIG and HBIE represent an evolution of the balanced portfolio that is designed to meet the needs of investors who are looking for consistent and high passive income as they contend with an ever-higher cost of living.


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