Kovacs: Perfect time for gold and utilities ETFs

January 17, 2019

By James Burton, Wealth Professional

 

Clients whose nerves have been frayed by recent market meltdowns and interest rate policy have been encouraged to embrace a more defensive position via Harvest Portfolio’s new ETFs.

The Oakville, Ontario firm on Tuesday launched the Harvest Equal Global Utilities Income ETF (HUTL) and the Harvest Global Gold Giants Index ETF (HGGG). To achieve lower overall volatility of portfolio returns, HUTL will write covered call options on up to 33% of the securities, while HGGG seeks to replicate the performance of the Solactive Global Gold Giants Index TR.

Michael Kovacs, President and CEO of Harvest, told WP that both funds are defensive in nature with one designed to provide investors with income at this late stage of the economic cycle.

Bringing HGGG to the market feels particularly timely given the headline-grabbing merger of Barrick Gold and Randgold Resources ($18 billion) and Newmont Mining Corp’s $10 billion all-stock purchase of Vancouver-based Goldcorp. Kovacs admits investors have been hurt by gold in the most recent past but expects a transition as prices firm and investors seek safe havens.

He said: “We’ve seen a real decline in gold share prices over the last six years and consolidation has started to occur, which is usually another sign of a market bottom. More importantly, it’s inversely correlated to stock markets and if you look at the price of gold in the past two or three months, as the markets have been getting beaten up, gold has actually been rising.

“We don’t have any lofty predictions as to where gold is going but whether you think we are going to get another inning or two [from the economy] or another puff on the cigar, it’s late in the game so at some point we will see a weakening in the US economy, which eventually means lower interest rates and possibly a lower US dollar and typically this is more bullish for gold.”

Kovacs admits that gold has been a tough place to be in recent years but believes the recent deals are positive signs because the big players will continue to make money. Their portfolio price of production, he added, is low at about $600-700 per ounce, meaning that even if gold rolls back, there is still excellent profit in these companies.

He said: “A lot of people dislike gold. They’ve been hurt, stocks have been beaten up and they are very hesitant to go that route but they also see the logic behind it. It’s going to be a transition that will occur over the next number of months, or year, but you will see more people start to allocate back to gold or gold shares.”

Uncertainty over the markets makes HUTL a useful defensive asset, according to Kovacs, albeit one that is more sensitive to rising interest rates. However, he reiterated that while there might be another hike or two from the US Fed, he sees that weakening because we are late cycle.

He said: “We may have another bump to go before that starts but it’s another place to position for safety defensively and with HUTL we also write options so we generate a high level of income. It’s a nice way to position in a defensive sector and generate some extra cash flow.”

The covered call option on that ETF seeks to add another 3-4% of income of top of the existing 4.5% that the fund is already earning through dividends. Panic over rising interest rates both here and in the US has largely subsided because of a number of economic headwinds and a slowdown in the economy, and Kovacs believes it could become a cyclical recession if there are a couple of quarters of negative growth.

Harvest is, therefore, targeting the growing retirement market that’s searching for income, which is currently hard to find in traditional fixed income vehicles.

Kovacs said: “So how do you generate extra income and try to maintain and grow your capital? We have a lot of products we’ve launched that actually meet those criteria. We are writing the options [in HUTL], which takes a little bit of the torque out of the fund but you’re monetising it, you’re taking some of that and paying it out every month.”

The funds take Harvest ETF suite to 12 and the latest two were instigated back in the summer and subsequently tested en route to launch. Kovacs is targeting the $100 million mark for both and urged advisors to look at the benefits.

He said: “It’s about positioning for income, taking a position in the utilities sector and generating a nice attractive cash flow. For the gold fund, it’s inversely correlated to markets and if we do see any type of downturn, it’s a great defensive asset to hold.”

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