By Harvest ETFs
On September 22, 2022 Harvest ETFs added a new equity income ETF to their lineup. Built with the same focus on leading companies and income generation through an active covered call strategy the new ETF comes with a new feature that many Canadian investors are seeking.
The Harvest ESG Equity Income Index ETF (HESG:TSX) includes a structured Environmental, Social, & Governance process.
“A rapidly growing set of Canadian investors want their investment products to reflect their values,” said Harvest ETFs President & CEO Michael Kovacs. “With this new ETF, we are providing a source of equity income at a high target yield from a portfolio following a structured ESG process.
“We think this fills a gap in the Canadian market for ESG equity cashflow.”
How HESG’s process works
HESG tracks the Solactive ESG US Equity Index TR in its portfolio construction. This index incorporates a set of ESG factors as well as key criteria associated with other forms of values-based investing.
“There’s a blurred green line between so many different forms of values-based investing,” said Harvest CIO & Portfolio Manager Paul MacDonald. “ESG means that portfolio holdings are considered based on the scores they receive for their environmental impact, role in society and internal governance.
“Many investors think of ESG as being the same as Socially Responsible Investing (SRI), which excludes companies and entire sectors based on their perceived negative impacts on society.”
MacDonald explained that the HESG Solactive index begins its process with SRI screens, eliminating sectors such as tobacco, alcohol, and weaponry. This helps the portfolio meet the popular expectations investors have for their ESG products.
Once the investable universe is screened for SRI factors, the index assesses the remaining companies by their environmental, social and governance scores as well as their aggregate ESG scores. Given that ESG scores can be a tool to quantify these non-financial risks, the index uses these scores to eliminate the companies which fall into the bottom 10% of scoring from each category.
Once SRI and ESG screens are applied, the focus shifts towards Harvest’s fundamental approach to equity income: leading companies and covered calls. The index selects the 30 largest companies in the screened universe by market capitalization and Harvest’s team of portfolio managers apply their active and flexible covered call option writing strategy to earn monthly cash distributions for unitholders.
The final ESG piece at work in this ETF is its proxy voting policy. The ETF can and will use the shares it owns of its portfolio companies to advocate and vote for policies that will improve ESG scores at these companies.
The graphic below explains the process simply.
Why an ESG Equity Income ETF makes sense
HESG launched with an initial target yield of 7.00%, matching the high income ETF investors have come to expect from Harvest Equity Income ETFs. With a structured ESG process to ensure the portfolio matches many ESG investors’ values, this ETF stands out by the income it generates.
The active and flexible covered call strategy used by Harvest’s team of portfolio managers means that the ETF can meet its monthly cash distributions, while maximizing the percentage of the portfolio participating in wider market growth opportunity. The team operates under a maximum write level of 33% meaning 67% of the portfolio is always exposed to market growth prospects.
“By combining our active & flexible covered call strategy, with a structured ESG process, we have created an ETF that can meet the needs and the values of a growing number of Canadian investors,” said Michael Kovacs. “Investors who want high income from an equity portfolio that aligns with their personal values can get that from HESG.”
Quoted in this article
President & CEO
Paul MacDonald, CFA
Chief Investment Officer