Equity income leader launches new ETF for covered call option cashflow


April 12, 2023

By Harvest ETFs

One of Canada’s leading covered call option ETF providers has just launched a new multi-sector diversified strategy for investors. The Harvest Diversified Equity Income ETF (HRIF:TSX) delivers access to six established covered call option ETFs in a single package.

HRIF holds the same underlying portfolio of large-cap equity income ETFs as the Harvest Diversified Monthly Income ETF (HDIF:TSX), which was one of the most popular ETFs launched in 2022, attracting $300 million in investment. The key difference between HDIF and HRIF is that where HDIF uses modest leverage at approximately 25%, HRIF will use no leverage. HRIF launched with an initial target yield of 8.0%.

“HRIF adds another prominent equity income option for Canadian investors,” said Michael Kovacs, President & CEO of Harvest ETFs. “It offers all-in-one access to a portfolio of Harvest ETFs, each of which use an active covered call option strategy to earn their high income yields. Investors get exposure to portfolios of large-cap leading companies, diversified across subsectors and styles, without the addition of any leverage-related risk.”

A truly diversified portfolio

The equal-weight portfolio held by HRIF at launch holds the following six ETFs.

Kovacs explained that each ETF holds a portfolio of leading companies in their particular sector and market area. That leadership is defined through quantitative and qualitative metrics such as market cap, market share, performance history and—in the case of certain underlying ETFs—dividend payment history. The companies selected in each ETF’s portfolio demonstrate leadership across those metrics.

By combining the six ETFs, HRIF delivers a diverse set of performance drivers. Tech has been a market growth leader for over a decade and remains a key allocation for investors . Healthcare shows significant defensive qualities, especially during inflationary and recessionary times. The brand leaders in HBF and Canadian leaders in HLIF are selected in large part due to their resilience across market cycles, market shares, and dividend payment history. US banks have faced headwinds lately but have long-term positive exposure to interest rate increases and remain structurally important to the global economy. Utilities are an almost textbook definition of defensiveness, providing stability and ballast for the ETF.

Taken together, HRIF delivers leadership from a wide set of companies which, combined with its high income yield, makes it an attractive ETF for many investors.

HRIF’s High Income Yield Explained

HRIF is launching with an initial target yield of 8.0% annually, paid as monthly cash distributions. That yield is earned by combining the underlying yields of its component ETFs, each of which employ an active & flexible covered call option strategy.

Covered call option ETFs effectively trade some upside potential for earned income premiums by ‘writing’ calls on a percentage of the ETF’s holdings. Where many covered call option ETFs use a passive strategy, writing calls on the same percentage of holdings each month, the Harvest ETFs held in HRIF use an active strategy.

Harvest’s active strategy means write levels are flexible up to a hard 33% write limit. That means 67% of the portfolio is exposed to market upside at all times, but also when option premiums are higher Harvest portfolio managers can either write at lower levels to capture more upside, or write at the same levels and ensure adequate cashflow is maintained for investors. Because volatility raises options premiums, this active strategy has advantages during periods of volatility as it can monetize that spikiness on the markets.

“We continue to see volatility in equity markets,” Kovacs said. “And the high income yields paid by covered call option ETFs can help investors generate returns during volatile periods and earn income that can support their lifestyle. Whether they’re an investor starting out or a retiree looking to cover expenses or RRIF withdrawals, we believe that a high income strategy combined with a large-cap diversified portfolio can benefit any investor. That’s what HRIF was built to deliver.”


Diversified Equity
Income ETF


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