ETF Basics

An ETF (Exchange Traded Fund) is a basket of securities built by an ETF issuer to achieve a specific objective. Unlike Mutual Funds, ETFs are traded on exchanges and their prices fluctuate throughout the day, much like stocks.

Unlike stocks, new ETF units can be created or redeemed based on changes in demand. This article explains in detail how ETFs are made and how they trade.

In general terms a passively managed ETF or investment fund will follow a strict set of rules—such as tracking an index—which means it does not require active portfolio changes and just imitates the index holdings. These strategies can capture a segment of the market in a cost-effective way but cannot act quickly to capture specific opportunities as they arise.

In an actively managed ETF portfolio managers make decisions related to the ETF on a daily basis. These can still come with rules, but the managers have more flexibility to capture opportunities as they see fit.

In the case of covered call option ETFs, a passive strategy would write call options at the same level each month. An active covered call option strategy allows portfolio managers to change the level of options the ETF sells.

This means the ETF can potentially generate more income or capture more upside opportunity based on the changing price of call options.

In Canada and the United States, the settlement period of equities, mutual funds, ETFs, corporate and government bonds, as well as principle-protected notes, will adopt what is called T+1 settlement. This will cut the time to settle a transaction to one business day from the original two. That will serve to make trading quicker and more efficient for investors and other market participants, enabling them to obtain the proceeds of their trade by the next business day.

Harvest Portfolios Group Inc. is an investment fund manager and an ETF Issuer, not a securities dealer, which means that retail investors must use a brokerage or financial advisor to buy and sell Harvest ETFs. Harvest cannot open investment accounts, accept any trading orders or provide investment advice.

ETFs don’t have any minimum initial investment requirements beyond the price of a single unit. Some brokerages have minimum requirements to invest with them, and other brokerages allow investors to buy and sell fractional shares, which would be priced lower than a full unit of an ETF. Generally, however, there is no minimum investment amount beyond the price of one unit of an ETF.

Because ETF classes trade independently on the TSX, investors are unable to switch from one class to another directly. Different classes of Harvest ETFs can be bought and sold on the TSX via your brokerage or investment advisor.

Harvest ETFs all trade on the Toronto Stock Exchange, which is an internationally recognized exchange. Our ETFs can be bought or sold on the TSX from any global location that allows international transactions. However, your ability to buy a Harvest ETF from your US investment account will depend on your dealer or facilitator’s ability to access the TSX for trading.

ETFs (Exchange-Traded Funds) and mutual funds are both investment vehicles, but they differ in structure and how they’re traded. ETFs are bought and sold on stock exchanges like individual stocks, offering flexibility in trading throughout the day, while mutual funds are typically traded only once per day after the market closes. ETFs often have lower management fees than mutual funds, which can result in cost savings for investors. Additionally, ETFs tend to be more tax-efficient due to their unique structure. Both options allow for portfolio diversification, but ETFs generally provide more transparency, as their holdings are usually disclosed daily.

When selecting a Harvest ETF, consider the following:

1. Investment Strategy: Harvest specializes in income-focused strategies like covered call writing for enhanced monthly income. For example, HHL generates cash flow while providing healthcare sector exposure.
2. Yield: High-yield ETFs like HHL, HHLE (with modest leverage), and single-stock ETFs like MSFH offer varying levels of monthly income.
3. Risk Profile: Choose ETFs that match your tolerance, from stable sectors to high-growth industries.
4. Asset Allocation: Balanced options like HBIG combine equities and bonds, while HDIF diversifies across multiple high-yield Harvest ETFs.
5. Fees: Actively managed ETFs like Harvest’s may have higher MERs but provide strategic income-focused management.
6. Fund Size & Liquidity: Larger funds like HHL ensure smooth transactions and robust liquidity.
7. Tax Efficiency: ETFs like HPYT combine U.S. Treasuries with covered call strategies, offering tax advantages.

By aligning these factors with your goals, you can find the right mix of income, growth, and balance

ETFs come in various types to suit different investment needs. Here's a summary of common ETF categories and Harvest ETF examples:

1. Equity Income ETFs: Focus on dividend-paying stocks and covered call strategies for monthly income (e.g., HHL). Available in CAD and USD options.
2. Enhanced Equity Income ETFs: Similar to Equity Income ETFs but with modest leverage for higher income (e.g., HHLE). Available in CAD and USD options.
3. High Income Shares ETFs: Invest in single, high-quality U.S. companies with covered call strategies (e.g., MSFH). Available in CAD and USD options.
4. Fixed Income ETFs: Focus on bonds for stability, enhanced by covered calls (e.g., HPYT). Available in CAD and CAD-hedged options.
5. Balanced Income ETFs: Combine equity and fixed income for diversification (e.g., HBIG, HDIF). Available in CAD options.
6. Sector/Thematic ETFs: Target specific sectors or themes like healthcare (HHL) or technology (HTA). Available in CAD and unhedged CAD options.
7. Growth ETFs: Focus on high-growth sectors or trends (e.g., HTA). Available in CAD options.

These options provide flexibility to align with your investment goals and preferences.

Evaluating an ETF’s performance requires considering your primary goals—whether you’re focused on growth, income, or a balanced outcome. For Harvest’s covered call ETFs, traditional benchmarks may not be a perfect comparison, so here’s a more tailored approach:

• Income-Focused ETFs: For income-oriented ETFs, especially covered call ETFs, performance can be evaluated by:
  • Yield: Review the ETF’s yield, as it reflects income generated relative to the ETF’s price. For covered call ETFs, a higher yield indicates strong income potential due to the income generated from options premiums in addition to dividends.
  • Distribution Consistency: Look for consistency in monthly or quarterly distributions. Covered call ETFs, like many of Harvest’s, often aim to provide steady income, which is particularly valuable for income-focused investors.
  • Sustainability of Income: Assess the ETF’s strategy, particularly the covered call approach, for sustainable income generation. Covered call ETFs may cap capital gains potential, so it’s essential to understand this trade-off if growth is also a goal.

  Example: The Harvest Healthcare Leaders Income ETF (HHL) can be evaluated by its distribution consistency and yield, considering how well it sustains income in different market environments.

• Growth-Focused ETFs: For growth-focused ETFs, evaluate their potential for capital appreciation by considering:
  • Total Return: Check the ETF’s total return over different timeframes (e.g., 1-year, 3-year, 5-year). For covered call growth ETFs, total return includes both price appreciation and income from dividends and options premiums.
  • Sector and Holding Performance: Review the growth potential of the sectors or industries in which the ETF invests. Growth-oriented sectors, like technology, may have high potential for capital gains.
  • Volatility: Covered call ETFs often have lower volatility than traditional growth ETFs, as the covered call strategy can reduce price fluctuations. This can be beneficial for investors seeking growth with some risk mitigation.

  Example: The Harvest Tech Achievers Growth & Income ETF (HTA) focuses on technology companies, where performance evaluation would include total return and volatility metrics to assess both growth potential and risk.

• Balanced or Outcome-Oriented ETFs: For ETFs designed for a balance of growth and income, or specific outcomes, a combined approach is helpful:
  • Yield and Total Return Balance: Look at both the yield (for income) and total return (for growth) to evaluate how effectively the ETF delivers on both objectives.
  • Consistency Across Market Conditions: Assess the ETF’s performance in various market conditions. A well-balanced ETF should deliver steady returns, both from income and from price stability, through market ups and downs.
  • Risk-Adjusted Returns: Consider metrics like the Sharpe Ratio, which indicate the ETF’s return relative to the risk taken. This is particularly valuable for balanced ETFs where managing risk is a key part of the strategy.

  Example: The Harvest Balanced Income & Growth ETF (HBIG) is designed for both growth and income. Evaluating its yield, total return, and performance consistency can indicate how well it meets a balanced approach.

• Peer Comparison: Since there may not be direct benchmarks for covered call ETFs, comparing the ETF to similar income-generating or growth-focused funds can provide context. Look at metrics like yield, total return, and volatility among comparable funds to assess how well the ETF performs relative to other options in the market.

While covered call ETFs don’t have exact benchmarks, these factors allow you to make a well-rounded assessment of an ETF’s performance based on your specific investment goals.

• Market Orders: These are widely available and allow you to buy an ETF at the current market price. They are typically executed immediately, prioritizing speed over price control. Most Canadian brokers offer this option.
• Limit Orders: Available with all Canadian brokers, limit orders let you set the maximum price you're willing to pay for an ETF. The order will only execute if the ETF’s price reaches or falls below your limit, providing more control over purchase price.
• Stop Orders and Stop-Limit Orders: These are available with many major Canadian brokers (e.g., RBC Direct Investing, TD Direct Investing, Questrade). Stop orders activate as market orders once the stop price is hit, while stop-limit orders combine a stop price and a limit price. Some smaller or discount brokers may not offer these options or may only provide stop-loss orders.
• Trailing Stop Orders: Offered by select Canadian brokers (such as Questrade), trailing stop orders adjust the stop price automatically based on market movements, which can help lock in gains in a rising market. Not all brokers support trailing stops, so it’s best to check availability.
• Day Orders and Good ‘Til Canceled (GTC) Orders: Both day and GTC orders are standard at most Canadian brokerages. Day orders expire at the end of the trading day if not filled, while GTC orders remain active until executed or canceled (often with an automatic expiry, typically 30-90 days, depending on the broker).

1. Avoid Market Open and Close: The first and last 30 minutes of the trading day often experience higher volatility due to large institutional orders, opening and closing trades, and news updates. Prices can swing more during these times, which may not always reflect the ETF's true underlying value. Midday trading (roughly between 10:30 a.m. and 3:00 p.m. ET) is usually more stable and allows for better price discovery.
2. Consider Trading in Sync with the ETF’s Primary Market Hours: For ETFs based on international markets, it can be helpful to trade when the primary market (where the ETF’s underlying securities are listed) is open. For example, if you’re buying an ETF with Japanese holdings, trading during Japan’s market hours often results in better price alignment.
3. Look at Market Trends and Avoid High-Volatility Days: Major economic announcements (like interest rate decisions, inflation data, or employment reports) or unexpected events can increase volatility. If possible, avoid buying on days when such events are scheduled, as they can lead to temporary price swings.
4. Use Limit Orders: Regardless of timing, using a limit order lets you set the maximum price you’re willing to pay, helping you avoid overpaying if the ETF price spikes. This approach is especially useful when trading during more volatile times.
5. Consider Time Horizon Over Short-Term Timing: For long-term investors, the exact timing of a purchase becomes less critical. Short-term fluctuations tend to smooth out over time, so focusing on the ETF's fundamentals and long-term growth potential is often more beneficial than attempting to "time the market" perfectly.

Liquidity - the efficiency or ease with which an asset can be converted into ready cash without affecting its market price - is essential for ETFs, but it’s important to recognize that an ETF’s liquidity is primarily derived from the trading volume of its underlying stocks. At Harvest ETFs, we design our products with this in mind, focusing on large-cap companies with high trading volumes to ensure that our ETFs benefit from robust liquidity.

Large-cap stocks, typically more liquid than smaller or niche stocks, help to stabilize the ETF's liquidity, making it easier for investors to enter and exit positions efficiently, even during volatile market periods. This focus on large-cap companies ensures that Harvest ETFs can offer investors competitive pricing, lower spreads, and smooth trading, which are essential in both income-generating and growth-focused portfolios.

For Harvest, prioritizing large-cap holdings is a strategic choice to enhance liquidity and support our investors’ needs for reliable, cost-effective access to markets.

Yes, you can hold ETFs within a retirement account. In Canada, this includes options like a Registered Retirement Savings Plan (RRSP), a Tax-Free Savings Account (TFSA), and even a Registered Retirement Income Fund (RRIF). These accounts not only allow ETF investments but also provide tax advantages that can enhance the benefits of owning ETFs, such as lower costs, broad diversification, and potentially steady income.

Many investors choose ETFs for retirement accounts because of the range of options they provide. ETFs allow you to invest across various sectors, regions, and asset classes, which is ideal for building a well-rounded, diversified portfolio. Income-generating ETFs—like the ones offered by Harvest—are particularly appealing in retirement accounts, as they can produce consistent cash flow, helpful for those looking to supplement income during retirement.

A key benefit of holding ETFs in registered accounts is the tax advantage. In a RRSP, for example, growth is tax-deferred until withdrawal, while in a TFSA, it’s entirely tax-free. For ETFs that use strategies like covered calls to generate income, these accounts can help shield that income from immediate tax, which may be especially useful for maximizing long-term gains.

In short, ETFs are well-suited for retirement accounts, as they offer a simple, efficient way to achieve growth, income, and diversification—key components of a strong retirement plan.

Guaranteed Investment Certificates (GICs)

• Description: Fixed-term, low-risk investments with a guaranteed interest rate. Ideal for short- to medium-term goals.
• Risk/Return Profile: Very low risk with low, predictable returns.
• Typical Costs: No direct fees; generally lower returns compared to other investments.
• Who Receives Fees: Financial institutions earn by reinvesting at higher rates and keeping the difference.

Fixed Income (Bonds and Bond Funds)

• Description: Bonds pay regular interest; bond funds pool multiple bonds into a professionally managed portfolio.
• Risk/Return Profile: Lower risk than equities, with moderate returns.
• Who Receives Fees: Fund management companies collect the MER. Brokers or advisors may charge additional fees.

Equities (Stocks)

• Description: Represents ownership in a company; potential returns from capital gains and dividends.
• Risk/Return Profile: Higher risk with potential for high returns.
• Typical Costs: Trading commissions ($5–$10 per trade) and bid-ask spreads; some brokers offer commission-free trading.
• Who Receives Fees: Brokers collect commissions; advisors may charge fees if managing a stock portfolio.

Mutual Funds

• Description: Pooled investments managed by professionals; typically a diversified portfolio of stocks, bonds, or other assets.
• Risk/Return Profile: Varies by fund type; moderate risk with balanced returns.
• Typical Costs: MERs (1%–3%); some funds also have sales charges or trailer fees.
• Who Receives Fees: Fund management companies receive the MER; trailer fees go to advisors or brokers who recommend the fund.

Exchange-Traded Funds (ETFs)

• Description: Trade on stock exchanges like stocks; offer exposure to various indices, sectors, or themes, including equity, income, enhanced, and single-stock ETFs with options for covered calls. ETFs are available in CAD, hedged, or USD versions.
• Typical costs for standard Index tracking ETFs have management expense ratios (MERs) between 1.0% and 1.5%; Equity or Bond ETFs with an active covered call management strategy typically have higher fees than standard ETFs, given the additional layer of management involved. The typical MER for these types of funds can range between 0.75% and 1.5% or higher, depending on the complexity of the strategy and the specific fund provider. The active covered call management requires more oversight, as portfolio managers actively select and manage options positions in addition to managing the bonds themselves. This can justify a higher MER compared to passive bond funds or standard bond ETFs.
• Leverage Costs: Leveraged ETFs incur additional fees due to borrowing costs and the need for frequent rebalancing to maintain leverage ratios. This can add an extra 0.5% to 1% in expenses beyond the standard MER.
• Hedging Costs: Currency-hedged ETFs also have additional costs to manage hedging positions, usually increasing the MER by 0.1% to 0.3% to cover hedging expenses.
• Risk/Return Profile: Varies by type; moderate risk, aligned with market performance.
• Typical Costs: Lower MERs than mutual funds (0.05%–1%); trading fees may apply.
• Who Receives Fees: Fund providers (e.g., BlackRock, Vanguard) collect the MER; brokers may charge trading fees.

Real Estate

• Description: Direct investment in property or indirectly via REITs (Real Estate Investment Trusts), which pool funds to invest in real estate portfolios.
• Risk/Return Profile: Moderate risk with potential for income and appreciation.
• Typical Costs: Direct ownership includes closing costs, property taxes, maintenance; REITs have MERs (0.5%–1.5%).
• Who Receives Fees: For property, fees go to service providers; for REITs, the fund management company collects the MER.

Commodities

• Description: Investments in physical goods (gold, oil, agricultural products) either directly or through ETFs or companies in the commodity sector.
• Risk/Return Profile: Higher risk, often volatile; can act as an inflation hedge.
• Typical Costs: Storage fees for physical commodities; MERs for commodity ETFs (0.1%–1%); futures contracts have trading fees.
• Who Receives Fees: ETF providers collect the MER; brokers may collect trading fees; storage providers charge for physical assets.

Alternative Investments (Private Equity, Hedge Funds)

• Description: High-risk assets like private equity or hedge funds, often for high-net-worth investors due to higher risk and minimum requirements.
• Risk/Return Profile: High risk with potential for high returns; generally illiquid.
• Typical Costs: High fees: 1%–2% management fee and typically 20% of profits as a performance fee.
• Who Receives Fees: Fund managers receive management and performance fees.

Cash and Cash Equivalents

• Description: Highly liquid, low-risk assets like savings accounts, money market funds, or treasury bills; ideal for short-term needs or emergency funds.
• Risk/Return Profile: Very low risk with low returns.
• Typical Costs: Minimal fees; money market funds may have MERs under 0.5%.
• Who Receives Fees: Fund providers collect the MER for money market funds; banks earn on interest spreads for savings accounts.

Annuities

• Description: Insurance products providing guaranteed income; often used in retirement planning.
• Risk/Return Profile: Low risk, steady returns; typically illiquid.
• Typical Costs: Administration, mortality, and investment management fees (1%–3%); surrender charges may apply.
• Who Receives Fees: Insurance companies receive fees to cover costs and provide advisor income.

Understanding Currency Hedging in Harvest ETFs

An ETF (Exchange-Traded Fund) is a basket of securities listed on an exchange for investors to buy and sell. While the concept is straightforward, investing in foreign assets introduces currency risk, especially for Canadians holding ETFs with U.S. securities.

Currency Risk Explained

When investing in ETFs holding foreign stocks, you face two risks:

1. Stock Price Risk: The value of the stocks can fluctuate.
2. Currency Risk: Changes in exchange rates (e.g., USD vs. CAD) can impact returns.

For example, if the CAD rises, your returns on U.S. holdings decline. Conversely, if the USD strengthens, your returns increase.

What is Currency Hedging?

Currency-hedged ETFs minimize the impact of currency fluctuations using tools like currency forwards to lock in exchange rates. Hedged ETFs protect against currency swings, offering more stable returns in CAD.

• Hedged ETFs: Reduce currency risk by offsetting exchange rate changes.
• Unhedged ETFs: Expose you to potential gains or losses from currency movements.

Why Choose Hedged or Unhedged ETFs?

• Hedged ETFs: Ideal for investors seeking stability and no currency exposure.
• Unhedged ETFs: Suitable for those who believe in the long-term strength of foreign currencies (e.g., USD) or want to assume currency risk for potential gains.

Harvest ETF Options

Harvest offers both Hedged “A” series and Unhedged “B” series ETFs, as well as USD “U” series for trading and income in U.S. dollars. This flexibility lets investors choose based on their goals and currency outlook.

For more information, consult your financial advisor or visit Harvest ETFs.

Here are some essential terms that every ETF investor should understand:

• Net Asset Value (NAV): The total value of the ETF’s assets (like stocks, bonds, or commodities) minus any liabilities, divided by the number of shares outstanding. NAV is calculated at the end of each trading day and serves as a benchmark for the ETF's value, though it can differ from the market price.
• Market Price: The price at which an ETF is bought or sold on an exchange, which can differ slightly from the NAV due to supply and demand. Investors should consider both NAV and market price to understand potential premiums or discounts.
• Premium/Discount to NAV: When the ETF’s market price is higher than its NAV, it’s trading at a premium. When it’s lower, it’s at a discount. Premiums and discounts can occur due to demand fluctuations or liquidity.
• Management Expense Ratio (MER): The percentage of the fund’s assets deducted annually to cover management fees, administrative expenses, and operational costs. While lower expense ratios are often favorable for passive ETFs, the appropriateness of the fee depends on the investor’s desired outcome, as actively managed ETFs typically have higher fees due to their hands-on management and strategic adjustments aimed at achieving specific goals.
• Tracking Error: The difference between an ETF’s performance and the performance of its underlying index. A low tracking error indicates the ETF is closely following its index, while a high tracking error shows deviation, often due to fees, liquidity, or fund structure.
• Bid-Ask Spread: The difference between the price buyers are willing to pay (bid) and sellers are willing to accept (ask). A lower spread indicates higher liquidity, meaning it’s easier to buy and sell the ETF without incurring additional costs.
• Liquidity: Liquidity in an ETF reflects how easily it can be bought or sold on the market without significant price changes. ETF liquidity is influenced by both the ETF’s own trading volume and the liquidity of its underlying assets.
• Creation/Redemption Mechanism: A unique feature of ETFs that helps maintain their price close to NAV. Authorized participants (APs) create new ETF shares when demand is high (keeping prices in line with NAV) and redeem shares when demand is low.
• Dividends and Yield: Some ETFs distribute dividends received from the underlying assets. The yield represents the annual income (dividends) as a percentage of the ETF’s price, providing an indicator of the ETF’s income potential.
• Hedged/Unhedged: A hedged ETF includes currency hedging to reduce the impact of currency fluctuations on returns. Unhedged ETFs are exposed to currency movements, which can affect returns if the ETF holds assets in foreign currencies.
• Leverage: Some ETFs use leverage to amplify returns, aiming to provide multiples of the daily performance of their index (e.g., 2x or 3x). Leverage can magnify both gains and losses, making leveraged ETFs riskier for long-term investors.
• Covered Call Strategy: A strategy used by certain ETFs where options are written (sold) on part of the ETF’s holdings to generate additional income. This strategy can cap upside potential but provides more income, appealing to income-focused investors.
• Tax Efficiency: ETFs are generally tax-efficient due to their structure and creation/redemption mechanism, which limits taxable events. However, certain ETFs, especially those with high dividend yields or active strategies, may distribute taxable income to shareholders.
• Inception Date: The date the ETF was launched. A longer track record can offer more data on the ETF’s performance, tracking error, and ability to weather market fluctuations.
• Underlying Assets: The stocks, bonds, or commodities that make up the ETF’s portfolio. Understanding the underlying assets helps investors gauge the ETF’s exposure to sectors, industries, or countries.

Diversification is one of the most powerful tools in investing. At Harvest ETFs, we believe in building well-diversified portfolios because it helps protect against the ups and downs of individual stocks or sectors, smoothing out overall returns and reducing risk.

Think of it like this: rather than putting all your eggs in one basket, diversification spreads your investments across a mix of companies, industries, and even countries. If one area of the market struggles, the impact on your portfolio is cushioned because other areas may perform well.

For example, Harvest’s equity income ETFs are built to hold stocks in different sectors, providing steady income while managing risk. This approach offers more stability than betting on a single company or sector. By holding a diversified basket of investments, you can enjoy the growth potential of the market while minimizing the risk of sharp losses.

In short, diversification helps investors achieve steady, long-term growth with less worry about the inevitable market fluctuations. At Harvest, our commitment to diversification is all about helping you reach your financial goals with greater confidence.

Common Methods: Opening a USD Account with a Canadian Brokerage or Advisor

Most Canadian investors who want to buy ETFs in USD start by opening a USD trading account, either with a Canadian brokerage or through their financial advisor. This approach lets investors:

• Buy and hold U.S.-dollar-denominated ETFs without converting funds back to CAD each time.
• Avoid ongoing currency conversion fees, saving on exchange rate costs over time.
• Opening a USD brokerage account or setting up a USD account with an advisor is generally straightforward. Both options allow for efficient management of U.S.-listed ETFs, while keeping costs down and providing the flexibility to hold investments directly in USD.

Alternative Methods for Buying U.S.-Dollar-Denominated ETFs

• Norbert’s Gambit
  • What It Is: This strategy enables investors to convert CAD to USD within their brokerage account at a much lower cost than typical currency exchange fees.
  • How It Works: Investors buy shares of a dual-listed stock (available in both CAD and USD) in CAD, then sell the equivalent USD shares in their USD account. This effectively funds a USD account with minimal conversion costs.
  • When It’s Used: This method is popular with investors looking to minimize currency conversion costs and who are comfortable with a multi-step process.
• Buying USD-Denominated ETFs Offered by Canadian Providers
  • What It Is: Some Canadian ETF providers, including Harvest ETFs, offer select ETFs in both CAD and USD versions.
  • How It Works: These USD-denominated ETFs can be purchased directly on Canadian exchanges through a CAD account, making them accessible without needing a separate USD account.
  • When It’s Used: This approach is ideal for investors seeking USD-denominated exposure without opening a separate USD account or for those who prefer Canadian-listed ETFs.
• Opening an Account with a U.S.-Based Brokerage
  • What It Is: Some Canadians open accounts with U.S.-based brokerages to gain direct access to U.S.-dollar-denominated ETFs and a broader range of U.S. investment options.
  • How It Works: Setting up a U.S.-based account may involve additional paperwork, such as filing IRS forms, and Canadians should consider potential tax implications.
  • When It’s Used: This option suits investors who frequently trade in USD or want access to specific U.S.-listed ETFs not available through Canadian brokerages.
• Using Foreign Currency Exchange Services
  • What It Is: Services like KnightsbridgeFX or XE offer competitive exchange rates compared to those provided by banks or brokerages.
  • How It Works: Investors use these services to convert CAD to USD at a favorable rate, then transfer the USD funds to their brokerage or advisor account.
  • When It’s Used: This is useful for investors looking to convert a large sum into USD at a favorable rate, which can then be used to fund a USD account for future ETF purchases.

Summary

For most Canadians, opening a USD account with either a Canadian brokerage or through an advisor is a practical way to buy U.S.-dollar-denominated ETFs while minimizing currency conversion costs. Choosing a USD account with an advisor provides the added benefit of professional guidance, which can be useful for those who want help with currency exposure and investment strategy. Other options, such as Norbert’s Gambit, offer efficient currency conversion for those comfortable with a few extra steps, while U.S.-based brokerage accounts and USD-denominated ETFs on Canadian exchanges are well-suited to specific investment needs and preferences.

When it comes to finding the right ETF, a bit of due diligence can go a long way in helping you choose the fund that best aligns with your financial goals. Here’s a step-by-step guide to making a well-informed decision, whether you’re new to ETFs or just want to refine your selection process.

Step 1: Define Your Investment Goals

Start by identifying what you want to achieve with your investment. Ask yourself:

• Are you looking for growth, income, or both?
• What’s your risk tolerance? For example, are you comfortable with high risk for higher potential returns, or do you prefer stability?
• What’s your time horizon? Knowing how long you plan to hold the investment will influence your choice.

Having clear goals will guide you to the right type of ETF that aligns with your needs, whether it’s focused on growth, generating steady income, or providing a balanced approach.

Step 2: Understand ETF Types – Index vs. Actively Managed

ETFs fall into two main categories, and understanding the difference can help you find a better fit for your strategy:

1. Index (Passive) ETFs: These ETFs track a specific index, like the S&P 500, aiming to replicate its performance. They are passively managed, which generally keeps fees low. However, because they simply follow an index, they won’t adjust to specific market opportunities or risks.
2. Actively Managed ETFs: These funds have portfolio managers who make strategic decisions to try to outperform a benchmark or achieve specific goals, such as generating higher income or managing risk. Actively managed ETFs tend to have higher fees due to this hands-on approach, but they may provide more tailored results.

Step 3: Research the ETF’s Strategy and Holdings

Once you have an idea of the type of ETF you want, it’s time to dig into the fund’s specifics:

• Read the Fund’s Strategy: Check the ETF’s website or prospectus to see what it aims to accomplish. For example, some actively managed ETFs focus on high-dividend stocks, particular sectors, or using covered calls to generate income.
• Check the Holdings: Look at what the ETF actually invests in. For an index ETF, this should closely resemble the index it tracks. For actively managed ETFs, holdings may vary as the manager adjusts to market conditions. Understanding the underlying holdings will help you see if the fund aligns with your goals.

Step 4: Focus on Total Return, Not Just Fees

Fees (expense ratios) are important, but they’re only one part of the equation. Instead of focusing solely on fees, consider the total return—the ETF’s price gains combined with any income distributions (like dividends). This gives a more comprehensive view of the ETF’s value to you as an investor.

• Low Fees Don’t Always Mean Better Performance: While index ETFs generally have low fees, they also just track the market and don’t actively respond to specific opportunities. Low fees can be appealing, but total return over time is a more meaningful measure.
• Active ETFs Can Justify Higher Fees with Performance: Actively managed ETFs typically have higher fees due to the added expertise and strategy involved. However, if the ETF’s active strategy leads to better overall returns or provides consistent income, it may still be worth the higher cost.

By focusing on net returns (total returns after fees) rather than just the fee amount, you can see if an ETF’s strategy and added costs are delivering real value.

Step 5: Look at Performance and Tracking Error

• Performance: For index ETFs, check how closely the fund’s performance aligns with the index it’s tracking. For actively managed ETFs, look at how they’ve performed relative to their stated benchmark.
• Tracking Error: For index ETFs, tracking error shows how closely the ETF mirrors the index. Lower tracking error indicates that the ETF is doing a good job at tracking its index, while high tracking error may suggest deviations, often due to fees or liquidity issues.

Step 6: Assess Risk and Volatility

Risk and volatility can impact your returns and peace of mind. Look for these key metrics:

• Beta: This measures how much an ETF’s returns vary compared to the overall market. A beta of 1 means it moves with the market; higher than 1 suggests more volatility.
• Standard Deviation: This shows how much the ETF’s returns fluctuate from the average return, giving a sense of its stability or volatility.

Step 7: Consider Dividend Yield (If Income is a Goal)

If generating income is part of your goal, check if the ETF pays dividends and what the yield is. Some income-focused ETFs provide regular dividend payments, which can be particularly appealing if you’re looking for consistent cash flow in a low-interest-rate environment.

Step 8: Read Reviews and Analyst Reports

Reading ETF reviews or analyst reports can give valuable insights into the fund's strategy, strengths, and potential risks. However, keep in mind that not all analyst reports fully account for covered call ETFs, as these reports may measure performance without considering the reinvested distributions. Covered call strategies generate regular income, and for an accurate picture, it’s essential to consider how this income contributes to overall returns, especially when reinvested.

Key Takeaway

Choosing the right ETF requires more than just picking a low fee. Instead, focus on your goals and look at the total return, which combines price gains and income after fees. Remember that index ETFs aim to replicate an index for broad market exposure, often at lower costs, while actively managed ETFs can provide more targeted results through active strategy, though with potentially higher fees. With these steps, you’ll be well on your way to selecting an ETF that best meets your needs.

Myth 1: "Covered Call ETFs are Only for Retirees, Conservative Investors, or Passive Investors"

Reality: Covered call ETFs are popular with retirees and conservative investors, but they offer benefits that appeal to a much wider range of investors, including advisors and passive investors. Many advisors and investors appreciate the steady income stream these ETFs provide, as it allows portfolios to deliver consistent cash flow without the need for active options management. This is a key advantage over traditional performance-focused ETFs, which aim primarily for capital growth.

Additionally, many covered call ETFs still provide market-like returns, making them a versatile choice for investors who want both income and growth potential. They’re also well-suited for registered accounts like RRSPs, DRIPs, and RRIFs, where the income generated can be reinvested tax-deferred or used to fund retirement income needs, adding extra value to long-term investment strategies.

Myth 2: "Covered Call ETFs Prevent Upside Potential"

Reality: While covered call ETFs can limit some upside, Harvest’s approach is specifically designed to balance income generation with growth potential. By limiting option writing to approximately 33% of the portfolio, Harvest’s covered call ETFs seek to maximize potential upside while still delivering steady income. This strategy allows the portfolio to capture growth in rising markets while generating additional income, aiming to enhance total return.

Myth 3: "Low Fees Are Always Better"

Reality: Many investors assume that low fees always make an ETF better, but actively managed ETFs (like covered call ETFs) often have higher fees due to the additional management required. The focus should be on total return after fees, considering the potential for income or risk management that covered call strategies offer.

Myth 4: "All Covered Call ETFs are the Same"

Reality: Not all covered call ETFs are created equal. While they may share a similar income-generating strategy, there can be significant differences in how these funds are managed. Track record matters—a strong track record often reflects the experience and skill of the team running the options strategy. Experienced managers can optimize option writing to balance income and growth potential, navigating various market conditions effectively.

Additionally, some covered call ETFs are systematically managed, where options are written according to a fixed, rules-based approach. Others, like those managed by experienced teams, may employ more active strategies, allowing for adjustments based on market conditions. This flexibility can add value by tailoring the strategy to changing market environments. Both management styles have their place, but understanding the approach can help investors choose the covered call ETF that best suits their goals.

Myth 5: "Covered Call ETFs Don’t Grow in Value"

Reality: While covered call ETFs may cap some upside, many still provide market-like returns, especially in stable or moderately rising markets. For many investors, the bigger focus is not solely on capital appreciation but on the consistent monthly income these ETFs provide. In fact, performance gains remain notional (unrealized) until you sell, whereas the income from covered call ETFs offers a tangible, steady cash flow that can support ongoing financial goals. This makes covered call ETFs appealing for investors seeking reliable income, especially if monthly income is a priority over pure growth.

Myth 6: "ETFs Always Trade at Their Net Asset Value (NAV)"

Reality: ETFs typically trade close to their NAV, but supply and demand can create slight premiums or discounts, especially in volatile or thinly traded markets. For covered call ETFs, income distributions can also impact market perception, leading to pricing variations from NAV.

Myth 7: "Analyst Reports Accurately Measure Covered Call ETFs"

Reality: Many analyst reports overlook the reinvested distributions of covered call ETFs, which skews performance comparisons. Since covered call strategies generate regular income, the total return (with reinvested income) offers a more accurate picture than just the share price movement.