Harvest Portfolios Group

Resilient ETF Strategies for Volatile Times | HDIF, HHL

May 31, 2022

By Harvest ETFs

Retirement IncomeInvestor sentiment is down. Persistent inflation, market volatility, and weak performance from bond markets have combined to push investor sentiment—as measured by the AAII bull-bear survey—to a near 30-year low. Many investors are seeking resilience from good Canadian-listed ETFs, high yield ETFs, and covered call ETFs that deliver monthly income and can help with cashflow need and overall return.

Harvest’s ETF strategy is designed for the long-term, which means showing resilience when markets turn rocky. By combining ETF strategy, investment sector, and authoritative management experience, these investments can help investors build a more resilient portfolio.

Resilience from Covered Call ETF Strategies

The right investment strategy is key to resilient investing in this climate. The old accepted wisdom of a 60/40 allocation to stocks and bonds respectively has been undermined by poor performance by both stocks and bonds in the past few months. In this environment covered call ETFs can prove their value as an asset class for investors. Covered calls can deliver consistent monthly income from an ETF, which can be seen as a key component of overall return in a difficult market.

The Harvest Diversified Monthly Income ETF (HDIF:TSX), for example, combines the wisdom of diversification with the power of covered call strategies with modest leverage to create a high yield ETF. By holding a portfolio of existing Harvest equity income ETFs, HDIF can help investors seeking a product with enough diversification to deal with potential shocks like inflation or rising interest rates. At the same time, by holding positions in a wide array of equity sectors it can still participate in market growth potential.    

In a market where investors are seeking resilience from their investments, the consistent high yields generated by covered call ETFs make these products into an attractive asset class. Within the covered call ETF asset class, however, investors may want to consider the specific sector they’re investing in.

Choosing a Sector-Specific Covered Call ETF

Many investors will seek out specific sectors as they try to build resilient portfolios. Traditionally defensive equity sectors like consumer staples have helped investors weather troubled times and economic downturns. Combining a sector like that with a covered call strategy can help investors achieve the resilience they’re seeking. But it’s important to pick the right sector.

In today’s environment of high inflation, and especially high commodity costs, the large-cap US healthcare sector is showing signs of resilience. Large-cap healthcare companies have a combination of low commodity price exposure, high profit margins, and consistent demand. When consumers are feeling the pinch, they’ll cut spending on their Netflix subscription before they stop spending on prescription drugs.

Harvest Healthcare Leaders Income ETF (HHL:TSX) captures the US large-cap healthcare sector and combines it with a covered call strategy to generate high income yields. While the healthcare sector is broadly attractive, it’s also a highly technical investable universe. Healthcare a wide array of subsectors with unique strengths and weaknesses. The sector also has a large number of riskier small companies that grab headlines and attention but lack the resilience of some large players.

When considering a sector for resilience, and especially when combining it with a covered call strategy, the experience and quality of the ETF’s management team is key.

Management Experience and Covered Call ETFs

Expert management is key to resilient covered call ETF investing during a volatile market. While retail investors’ greatest strength in an environment like this is to take a long-term view, professional portfolio managers have the tools to take advantage of opportunity in volatility. Covered calls, when actively managed, are able to generate higher premiums during volatile times.

When markets are choppy, call options—the opportunity to buy a stock at today’s price at a later date—are in higher demand. An actively managed covered call ETF can therefore generate higher premiums from their call options in a volatile market. Passive, rules-based covered call ETFs that require covered calls to be written at a consistent level every month are constrained in a volatile market and can’t offer the same advantages.

Investors seeking a resilient covered call ETF may want to look at the rules governing a particular ETF’s covered call strategy. They may also want to look at the experience of the management team and the scale of an ETF issuer’s call option writing. If an ETF issuer writes a huge volume of call options, or has a management team that has taken call option strategies through significant market downturns, those can be signs of skilled managers and a powerful investment philosophy that can help secure an ETF’s resilience.

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