How Covered Call ETFs can serve Ultra High Net Worth Investors


April 27, 2023

By Harvest ETFs

Ultra-high-net-worth investors have a unique set of needs. These investors—generally defined as those with over $30 million in investable assets—face different circumstances, considerations, and challenges than other investors. While no investors are the same, many ultra-high-net-worth, and high net worth, investors confront three issues: a need for high income, a need to offset volatility and protect capital, and a desire to leave a lasting legacy.

That’s often why these individuals seek the support of a family office or dedicated financial advisor. These professionals can provide a more bespoke level of service including financial planning, investment management, philanthropic advice, estate and tax planning as well as more personal touches like concierge services. They can help ultra-high-net-worth individuals navigate their challenges, provided they have the right tools.

We believe that Equity Income ETFs using covered call options are one such tool, that can help address those three challenges faced by these investors and the financial advisors, family offices, and other professionals who serve them.

High Income Needs

An ultra-high-net-worth lifestyle can be very expensive to maintain, that’s often why these individuals seek out a family office or dedicated financial advisor. According to the UBS World Ultra Wealth Report, the average ultra-high-net-worth individual spends $1.1 million per year on luxury goods.

However, most of these investors achieved their status by saving money and spending prudently. According to a study of US millionaires by Spectrem Group, respondents rated a regular savings program as one of the most important priorities, ranking it 82 out of 100 for importance. These investors clearly see saving—not spending—as important.

Therefore, these investors need a way of paying for their lifestyles without spending away their hard-earned savings.

Equity Income ETFs can help those investors because they offer high monthly income distributions with significant annualized yields. Harvest’s suite of equity income and enhanced equity income ETFs come with annualized yields between 6.4% and 10.85% as at March 31, 2022. They generate their yields through the sale of covered call options, the premiums from which are bundled with any dividends and passed on to unitholders as consistent monthly income. Harvest enhanced equity income ETFs add modest leverage at approximately 25% to increase the yield and market exposure.

Ultra-high-net-worth investors often ask their family offices or financial advisors for high income to support their lifestyles, and covered call option ETFs can deliver some of that income. Perhaps more importantly, they can also help preserve capital and offset volatility for those investors.

Volatility offsets and protection of capital

Most ultra-high-net-worth investors, when they speak with their financial advisors, family offices, or accountants, are not asking these professionals to ‘make them rich,’ they’ve already done that themselves. The request, more often is ‘keep me rich.’ Between tax exposure, market volatility risk, and lifestyle expenditures, these individuals see the myriad ways in which their fortune can be chipped away.

Equity Income ETFs using call options can help ultra-high-net-worth investors, and the professionals they work with, confront those issues. When actively managed—as all Harvest Equity Income ETFs are—covered call options strategies can actually monetize market volatility, earning higher premiums during periods of elevated volatility without increasing the write level. Moreover, the income paid by those ETFs can help offset any potential short-term losses due to market volatility and contribute to total return. The example of 2022, a particularly volatile year on the markets, shows this utility clearly.

It’s worth noting, as well, that these ETFs still hold portfolios of equities and—through active management—seek to maximize market upside potential while ensuring consistent and adequate cashflow. That means an ETF holding can grow with the market while it pays its income distributions.

Tax considerations will also often be front of mind for an ultra-high-net-worth individual, as they likely face the risk of a very high tax burden. Moreover, their wealth typically exceeds the limits of registered accounts, and therefore most of their net worth won’t benefit from those tax advantages. The cashflows generated by covered call option ETFs, however, are considered tax efficient. That’s because premiums from covered call options are taxed as capital gains, rather than income. You can read more about this tax efficiency here.

Covered call option ETFs can help these investors offset volatility, maintain market exposure, and generate tax efficient income. As outlined above, that income can help an ultra-high-net-worth individual maintain their lifestyle. The final consideration, therefore, is in the leaving of a legacy.

Leaving a lasting legacy

Many Canadians want to leave an inheritance to their heirs, but ultra-high-net-worth individuals tend to want their legacy to extend beyond just their family. The Wealth-X and UBS World Ultra Wealth Report shows that these individuals tend to be philanthropists. Most give to charities and causes, notably in education and healthcare.

Covered call option ETFs can help these individuals leave legacies for their families and the causes they value. First and foremost, the above-outlined advantages in preserving capital and offsetting spending can help ensure a healthy amount is preserved for an ultra-high-net-worth individual to bequeath after they have passed on.

However, if the income paid by these ETFs is not needed to support an individual’s lifestyle, it can be turned into consistent contributions towards either a cause they believe in or the financial wellbeing of a loved one. That income can help these individuals leave a living legacy, and see their good fortune go to people and causes they value before they have passed on.

The considerations ultra-high-net-worth individuals face are myriad and unique. However, covered call option ETFs can help address many of those considerations and play a valuable role in the financial lives of these individuals, and the work of the financial services professionals who serve them.

Equity Income ETFs
Learn more
Enhanced Equity Income ETFs
Learn more

For Information Purposes Only. All comments, opinions and views expressed are of a general nature and should not be considered as advice and/or a recommendation to purchase or sell the mentioned securities or used to engage in personal investment strategies.

You will usually pay brokerage fees to your dealer if you purchase or sell units of the Fund(s) on the TSX. If the units are purchased or sold on the TSX, investors may pay more than the current net asset value when buying units of the Fund(s) and may receive less than the current net asset value when selling them. There are ongoing fees and expenses associated with owning units of an investment fund. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in these documents.

Certain statements in the Harvest Blog are forward looking Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS.

FLS are not guarantees of future performance and are by their nature based on numerous assumptions, which include, amongst other things, that (i) the Fund can attract and maintain investors and have sufficient capital under management to effect their investment strategies, (ii) the investment strategies will produce the results intended by the portfolio managers, and (iii) the markets will react and perform in a manner consistent with the investment strategies. Although the FLS contained herein are based upon what the portfolio manager believe to be reasonable assumptions, the portfolio manager cannot assure that actual results will be consistent with these FLS.

Unless required by applicable law, Harvest Portfolios Group Inc. does not undertake, and specifically disclaim, any intention or obligation to update or revise any FLS, whether as a result of new information, future events or otherwise.

Harvest ETFs Announces Increases to Monthly Cash Distributions

Harvest ETFs announced by press release on June 25, 2024 that certain ETFs will increase their monthly cash distribution amount for all classes taking effect for the July 31, 2024 record date with a payable date of August 9, 2024. For more details, please read the press release.