Considering Income ETF Investing? Here are some key terms to understand | ETFs

Date

October 11, 2022

Date

October 11, 2022

Date

October 11, 2022

By Harvest ETFs

The rising popularity of ETFs have opened a wide range of investment strategies to ordinary investors. ETFs can package strategies that were once reserved for institutional money managers—like options writing, alternative investing, or leverage—into an easily tradeable unit.

However, as these strategies become easier for ordinary investors to access, they may begin encountering unfamiliar terms used widely among professional managers.

While the universe of ETF strategies is perhaps too wide to fully define here, this guide will outline some key general ETF terminology as well as key terms used in the equity income ETFs that Harvest ETFs is known for.

Net Asset Value (NAV) and Market Price

The Market Price of an ETF is the price at which a unit of an ETF trades and closely tracks the Net Asset Value (known as the NAV) of the ETF’s holdings. Unlike mutual funds, ETFs trade during the day on stock exchanges, therefore an ETF’s NAV will fluctuate while the market it trades on is open. The NAV of an ETF is tied to the aggregate value of the ETF’s portfolio holdings. If the value of those securities rises, the NAV should rise. If the value of those securities falls, the NAV should fall. The market price should track those movements.

This article details how ETFs are made and how they trade on exchanges.

Management Fee vs. MER

Management Fees are the costs an ETF manager passes on to the unitholder for managing the ETF. That fee is how an ETF unitholder pays for its various business expenses and compensates its management team. Fees can vary a great deal between ETFs largely based on the strategies involved. Passive or index ETFs, which do not involve much work on the part of portfolio managers, tend to charge lower fees. Actively managed ETFs, which may include a more sophisticated strategy or require more work to manage will typically charge higher fees.

MER stands for Management Expense Ratio, which is published by an ETF on a biannual basis. MER represents the total costs of an ETF including the fees charged by the manager, plus operating expenses like legal fees, auditing, administrative and other costs plus tax.

When comparing ETFs, it’s worthwhile to consider what strategies the ETF is using, those can help explain the management fee and MER of that ETF.

Yield

Some ETFs offer an income yield, which is usually displayed as a percentage on the ETF’s website and specific marketing materials. Unless otherwise specified, that yield number is a percentage of the ETF’s Market close price as at a specific date. Typically, a yield number is annualized. An ETF that pays out its income in monthly or quarterly distributions (more on that term below) will still display an annualized yield.

This article explains a bit more about why a big yield number alone might not be the best for an investor.

Distributions vs. Dividends

Many investors will refer to the income they are paid by their investments as ‘dividends’ and go searching for dividends when looking for an income investment. This can prove to be misleading. The common use of the term ‘dividends’ generally means any income paid by an investment. However, the technical definition of dividends is the income paid by a specific company to its shareholders. ETF providers will generally use that stricter technical definition.

They use that definition because many income investments generate their income from means other than the collection of dividends.

For example, a Harvest equity income ETF like the Harvest Healthcare Leaders Income ETF (HHL:TSX) generates the cashflow it pays to unitholders in part by collecting the dividends paid by the companies it owns. The larger portion of HHL’s cashflow is generated by the writing of covered call options. Therefore, HHL pays a ‘distribution’ every month to its unitholders, not a dividend.

Prospective investors looking for dividends from an ETF should look instead for the term ‘distribution’ as that will usually point to the amount—and the frequency—that the ETF pays its cashflow.

You can learn about covered call options here.

The Art of Covered Call Writing
Disclaimer

For Information Purposes Only. All comments, opinions and views expressed are of a general nature and should not be considered as advice and/or a recommendation to purchase or sell the mentioned securities or used to engage in personal investment strategies.

You will usually pay brokerage fees to your dealer if you purchase or sell units of the Fund(s) on the TSX. If the units are purchased or sold on the TSX, investors may pay more than the current net asset value when buying units of the Fund(s) and may receive less than the current net asset value when selling them. There are ongoing fees and expenses associated with owning units of an investment fund. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in these documents.

Certain statements in the Harvest Blog are forward looking Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS.

FLS are not guarantees of future performance and are by their nature based on numerous assumptions, which include, amongst other things, that (i) the Fund can attract and maintain investors and have sufficient capital under management to effect their investment strategies, (ii) the investment strategies will produce the results intended by the portfolio managers, and (iii) the markets will react and perform in a manner consistent with the investment strategies. Although the FLS contained herein are based upon what the portfolio manager believe to be reasonable assumptions, the portfolio manager cannot assure that actual results will be consistent with these FLS.

Unless required by applicable law, Harvest Portfolios Group Inc. does not undertake, and specifically disclaim, any intention or obligation to update or revise any FLS, whether as a result of new information, future events or otherwise.

Harvest ETFs Announces Increases to Monthly Cash Distributions

Harvest ETFs announced by press release on June 25, 2024 that certain ETFs will increase their monthly cash distribution amount for all classes taking effect for the July 31, 2024 record date with a payable date of August 9, 2024. For more details, please read the press release.

PRESS RELEASE