By David Wysocki
The Harvest Diversified Monthly Income ETF (HDIF:TSX) has become a widely used investment for passive income seeking Canadians. One of the most popular ETFs launched in Canada in 2022, HDIF combines a portfolio of Harvest equity income ETFs—earning high yields through dividends and covered call options strategies. To deliver a higher yield and more market exposure it adds modest leverage—borrowing roughly 25% of the amount invested in HDIF and investing that borrowed money in the same underlying holdings.
The result is an ETF with a high annualized yield compared to most fixed income or traditional income investments, which is exposed to market growth opportunity from a diverse portfolio of large cap businesses.
Earlier in 2023 Harvest ETFs followed up on the success of HDIF by launching the Harvest Diversified Equity Income ETF (HRIF:TSX). This ETF accesses the same underlying portfolio of ETFs as HDIF, but does not include a leverage component – offering a one-stop strategy for investors who are less willing to take on leverage-related risk.
Why a non-leveraged version of HDIF could be attractive to some investors and financial advisors
Many investors with different times horizons and risk tolerances may want to limit leverage in their investments. Leverage magnifies both gains and losses. While leverage increases the prospect of higher returns, the risk of losses is also increased. Canadian investors with a lower risk tolerance may still want the diversity and consistent income offered by a product like HDIF but are willing to forego the extra yield and upside opportunity provided by leverage.
Risk management is a key aspect of the work done by Canadian financial advisors as well. As part of their risk management efforts, these advisors may choose to—or be instructed to—avoid investments that include a leveraged component. By using no leverage, HRIF can give those advisors access to a high yield diversified equity income ETF for their clients, without taking on additional leverage-related risk.
It should be noted that the roughly 25% leverage used in HDIF is considered modest and we at Harvest ETFs believe it’s within an acceptable limit for the goals and income needs of many Canadian investors. Nevertheless, some investors see any amount of leverage as too much, and HRIF offers them many of the same benefits delivered by HDIF.
The benefits of an HRIF investment
Much like HDIF, HRIF is designed to deliver consistent monthly income and long-term growth opportunity. It does so by investing in a basket of Harvest equity income ETFs. Each of these ETFs holds a portfolio of leading large-cap companies from different sectors, including healthcare, technology and utilities. That large-cap focus is a core aspect of Harvest ETFs’ investment philosophy. We believe in long-term investing and the steady growth of large businesses over the long-term. Companies that dominate their sectors and markets, that have global reach, and robust financials are the companies we focus on, because we see them as the investments positioned to grow over the long-term.
Each ETF held in the HRIF portfolio also employs an actively managed covered call option strategy which is combined with dividend yields to generate a consistent monthly cash distribution. That covered call option strategy results in an income yield typically higher than most fixed income products. Moreover, because the strategy is actively managed our portfolio managers are able to take advantage of short-term opportunities in options markets to earn higher premiums, the ETF can monetize periods of market volatility and allow for more potential upside capture than a passively managed strategy can.
While leverage plays a key role in the yield and market returns of HDIF that have made it a popular choice for Canadian ETF investors, the core of the HDIF ETF is its allocation to portfolios of leading companies and its covered call option income. In HRIF, Canadian investors and financial advisors get the same core thesis and underlying portfolio holdings without the addition of leverage-related risk.
David Wysocki is the VP of National Sales at Harvest ETFs. He is a seasoned sales executive who began his career as a financial advisor before taking on a sales role to develop the ETF market for a leading Canadian financial institution. David now leads a large team of sales professionals across Canada. He has a deep knowledge of Harvest products and the broader market and regularly presents ETF insights and macro commentaries to Canadian financial advisors.