Commentary from Michael Kovacs, President & CEO, Harvest Portfolios Group on the Harvest Banks & Buildings Income ETF (“HCBB”)

Can you explain the expected benefits of this ETF to the Canadian investor?

The original Harvest Banks & Buildings Income Fund was set up in October 2009 to provide Canadian Investors with a balanced approach to two core Canadian sectors; the Financial and Real Estate sectors for income and growth purposes. The fund can also invest up to 25% of the assets in US Financial and Real Estate sectors. These sectors have been key elements of the Investment landscape for decades and provide solid long-term income and growth that the fund collects and allocates to unitholders. Now as an ETF, investors can benefit from the same successful strategy but at a lower fee.

 

Considering the threat of rising interest rates in Canada, do you foresee a continued interest in income from Banks and Real estate?

Historically banks have benefited from higher interest rates as it allows them to increase the spread on products being offered against their internal borrow rate. Higher rates mean improved profitability, which in turn, positively affects dividends and price performance. The Real estate issuers are mainly REITs which have historically seen market price declines during periods of high interest rates as they are more interest rate sensitive. That said, the high levels of distributions make up for the declines in stock prices. HCBB is a balanced approach where the manager can actively reduce the exposure to REITs during the period of higher rates and allow for more Bank exposure.

 

Can you comment on the outlook for banks and real estate in Canada?

Canadian Banks have historically been great investments and continue to be steady generators of dividends. Canadian Banks are large and secure franchises and have grown prudently outside our borders. We expect that they will continue to be steady performers and dividend growers for the foreseeable future.

The large REIT market in Canada is diversified across several sub-sectors in areas such as: commercial, office and senior housing markets. Many prime real estate properties in Canada can only be accessed through REITs or large pension funds. Although more interest rate sensitive than the Banks, REITs provide steady and high levels of income and have proven to be good long-term investments as overall prime property values increase. We see this trend continuing.

 

What are the key factors driving dividends (and growth) in banks and real estate?

The Canadian Banks continue to expand their businesses into non-traditional banking areas, such as trading and Insurance while maintaining solid mortgage and deposit systems. The Canadian banks are also establishing franchises in the United States and South American/Caribbean markets.

The Canadian REIT market has many high-quality REITs with top-performing assets in major markets across the country. They provide high yields and more steady growth characteristics. As a trust structure, the REIT can pay out a large portion of its earned income to investors which make them very attractive vehicles for Income investors.

 

S&P/TSX REIT and S&P/TSX Financials Indicies – Normalized (Source: Bloomberg 2009-06-12 to 2018-03-26)

S&P/TSX REIT and S&P/TSX Financials Indicies – Normalized (Source: Bloomberg 2009-06-12 to 2018-03-26)