By Caroline Grimont
We all know that one person in our lives who bought Apple in the 1980s, or if you weren’t born back then, then you probably know someone with diamond hands, who bought GameStop at the bottom and sold at the top. It is hard to not feel resentful when we hear or read these stories, and we often wonder if perhaps the ship has sailed on other opportunities too.
At the other end of the spectrum are stocks that are so steady, and stable, and move so little, that some might consider them “boring” almost. To my mind, these are stocks that have low volatility, steady dividend payouts, stable cashflows. Last summer, a friend and I were driving from Charlottetown to Halifax, and we were talking about this, and I asked her what she thought was a boring sector, and she said, “This!”
We were driving over the Confederation Bridge at the time, and I looked perplexed, so she expanded, “Bridges, roads, dams, railways. Infrastructure. It’s boring, right? It takes decades to build. It costs a bundle. And then you are forced to pay fares and tolls? Should be good money for investors, right?”
I thought back to Toronto’s Eglington Crosstown LRT that has been under construction for most of this millennium and is not anywhere near full operationality and is also severely over budget. I thought, well it may be boring, but I’d also like for some of the “move fast” of the FAANG days, with less “break things,” I mean, who wants a broken bridge.
Which lead to (for me, at least) a brainwave. What if I could invest a stock that built infrastructure, but on the internet? Enter ‘Next Generation Digital Infrastructure.’
What is Next-Gen Digital Infrastructure?
You’ve heard of artificial intelligence. The metaverse. Data centers. Edge computing. Data storage/the cloud. Cloud infrastructure. High-Speed 5G. All of these are technologies and/or systems that support the online world, and the accompanying online economy. As more and more of our lives move online, we need structures and systems that can help support it. Think of it as the dams, or highways, or bridges of our online lives, that help make the entire digital ecosystem secure, efficient, safe, and effective.
All of this constitutes next-gen digital infrastructure, and many believe that this is where investors should pay attention over the next few years. Last month, the World Economic Forum launched the Connected Future Initiative to outline the parameters for optimal public-private cooperation to unlock the full potential of globally scaled, interoperable and future-ready Digital Public Infrastructure (DPI.)
“DPI refers to the essential digital systems and platforms that enable individuals, businesses and communities to participate in the digital economy and society. As the digital backbone for the future of communications, commerce and interactions, DPI represents a global multi- trillion-dollar opportunity to foster innovation, reduce barriers to access and enable growth and efficiency across multiple industries,” the website notes.
Why Consider Next-Gen Digital Infrastructure?
The Ontario Teachers Pension Plan is one of the largest pension funds in the world, with over $266 billion in net assets. In October 2024, it released a report titled “The Underpinnings of Our Virtual World Investing in Digital Infrastructure,” where it laid out its case for investing in physical assets and digital infrastructure. The report lays out four reasons:
- Mobile phones are a critical fact of life, and are used by billions to access the internet,
- Businesses are embracing digitalization and the cloud,
- We’re at the dawn of a new era of interconnected devices, and
- Artificial intelligence is moving into the mainstream.
The report ends saying, “Investing in digital infrastructure is critical.”
Meanwhile, in 2023, Allied Market Research published a report titled, “Digital Transformation Market that says that the digital transformation industry generated $721.6 billion in 2022, and is anticipated to generate $6.8 trillion by 2032, witnessing a CAGR of 25.4% from 2023 to 2032.
What Should Investors Do?
If you believe in the story of next generation digital infrastructure, and are looking for blue-chip names that also provides steady monthly income, the Harvest High Income portfolio of single stock ETFs could provide some ideas. Here are three for you to consider:
- Amazon
- Microsoft
- NVIDIA
1. Amazon
Digital and e-commerce giant Amazon has a vertical called Amazon Web Services, that describes itself as the world’s most comprehensive and broadly adopted cloud, offering over 200 fully featured services from data centres globally. Services include blockchain, computing power, storage, and AI.
If you’d like access to Amazon, and also want regular cash distribution, you could consider the Harvest Amazon High Income Shares ETF (AMZH), which invests all its asset in shares of Amazon. AMZH pays monthly distributions. To support its monthly cash distributions, AMZH overlays an active covered call writing strategy on up to 50% of the position. Units of the ETF are available in CAD (AMZH) and USD (AMZH.U).
If you like the sound of all of this, and are comfortable with leverage, this fund also has an enhanced leverage option – the Harvest Amazon Enhanced High Income Shares ETF (AMHE) – which, alongside the active covered call writing strategy on up to 50% of the portfolio, also applies modest leverage at around 25% for higher income and growth potential. Units of the ETF are available in CAD (AMHE) and USD (AMHE.U).
2. Microsoft
I’m currently writing this on Microsoft Word, and will send it over to my editor on Microsoft Teams. Microsoft is a global leader in software services, devices, and solutions but Azure is where the next-gen digital infrastructure comes in. According to its website, the Azure cloud platform contains more than 200 products and cloud services designed to help you bring new solutions to life—to solve today’s challenges and create the future.
If you think you should be earning back some of that money you spend on licensing Microsoft Excel, you could consider the Harvest Microsoft High Income Shares ETF (MSFH), which invests all its assets in shares of Microsoft. MSFH pays monthly distributions. To support its monthly cash distributions, MSFH overlays an active covered call writing strategy on up to 50% of the position. Units of the ETF are available in CAD (MSFH) and USD (MSFH.U).
If you like the sound of all of this, and are comfortable with leverage, this fund also has an enhanced leverage option – the Harvest Microsoft Enhanced High Income Shares ETF (MSHE) – which, alongside the active covered call writing strategy on up to 50% of the portfolio, also applies modest leverage at around 25% for higher income and growth potential. Units of the ETF are available in CAD (MSHE) and USD (MSHE.U).
3. NVIDIA
NVIDIA is a dominant force in the semiconductor industry, known for its graphics processing units (GPUs) used in gaming, professional visualization, data centers, and automotive markets. The company is at the forefront of generative AI and machine learning technologies. Its GPUs form the foundations of AI and machine learning applications. All of this makes NVIDIA a critical component of next-gen computing.
One way for investors to get in on that action is to consider the Harvest NVIDIA High Income Shares ETF (NVDH), which invests all its assets in shares of NVIDIA. NVDH pays monthly distributions. To support its monthly cash distributions, NVDH overlays an active covered call writing strategy on up to 50% of the portfolio. Units of the ETF are available in CAD (NVDH) and USD (NVDH.U).
If you like the sound of all of this, and are comfortable with leverage, this fund also has an enhanced leverage option – the Harvest NVIDIA Enhanced High Income Shares ETF (NVHE) – which, alongside the active covered call writing strategy on up to 50% of the portfolio, also applies modest leverage at around 25% for higher income and growth potential. Units of the ETF are available in CAD (NVHE) and USD (NVHE.U).
How Do Covered Call Single Stock ETFs Work?
Covered call single stock ETFs, such as the ones featured in Harvest’s High Income Shares suite, take a long-term view of the underlying stock, and then sell call options on the said stock. A call option is also a financial derivative contract, which gives the buyer the right (but not the obligation) to buy the underlying security, in this case, the stock held by the ETF, at a predetermined price, within a certain period. This price is called the strike price. The buyer pays a price i.e. option premium to the ETF for this call option, and this premium is the income for the ETF, that is paid out to the unit holders of, in this case, the single stock ETF.
Now what happens when the period is up? If the stock price in the general market rises above the strike price, the option holder will likely exercise his/her right to buy the stock, and the ETF will, theoretically, need to sell the stock at that strike price. If the stock price in the general market is below the strike price, the ETF gets to keep both the stock, and the option premium. Meaning that the ETF gets to keep both the income from the call option, as well as the stock. You can read more about covered calls here.
Who Should Consider Single Stock ETFs in Canada?
For those who like an individual stock but also want consistent income, Single Stock ETFs with covered calls offer a way to earn monthly cash distributions while staying invested. This strategy provides exposure to individual companies while generating income, making it an option for investors looking to balance growth potential with regular cash flow.
Why Harvest for Single Stock ETFs?
Harvest ETFs is a market leader in call option ETFs. Harvest launched its first ETFs in 2016 and has established itself as one of the top option writing firms in Canada. Harvests’ key objective is to actively generate monthly cash flows. Harvest has a maximum 33% on any position written (higher levels for Harvest High Income Shares ETFs and Harvest Fixed Income ETFs) , allowing for both regular income, and upside potential. The Harvest strategy specifically has an active & flexible monthly determination of how many options are required, how many and when to write each option to generate the net cash flow required for the distribution. You can find out more about the Harvest strategy here.
What About Taxes?
From a tax standpoint, it is important for Canadian investors to remember that this income received from covered calls is considered capital gains and is not considered interest income. However, interest income is taxed as ordinary income. Note, though that most Harvest Equity Income ETFs hold primarily U.S. equities, which would not be eligible for the Canadian Dividend Tax Credit.
What’s the Bottom Line?
Next-gen digital infrastructure is happening all around is. It’s not just the physical assets underpinning these services, but also about the services, structures and platforms built to support our modern life, most of which is lived online. The companies involved with building these systems will likely shape the trajectory of how we live.
So if you’re an investor who thinks that this is only the beginning, want a regular income, and are willing to sacrifice a little bit of that upside for a regular cash flow, you could consider the Harvest suite of single stock ETFs, and AMZH, NVDH, and MSFH.
Disclaimer
Commissions, management fees and expenses all may be associated with investing in Harvest Exchange Traded Funds (managed by Harvest Portfolios Group Inc.) Please read the relevant prospectus before investing. This article is meant to provide general information for educational purposes. Any security or investment mentioned herein is for illustration purposes and should not be taken as an invitation to purchase or sell such security or investment. The content of this article should not be construed as investment advice. Tax, investment and all other decisions should be made with guidance from a qualified professional.
