The three investment strategies inside one ETF | HDIF

July 4, 2022

By Harvest ETFs

The three investment strategies inside one ETF | HDIFDavid Wysocki explains Harvest ETFs to critical audiences. The Vice President of National Sales for Harvest spends his days outlining the investment strategies and goals built into each Harvest ETF to investment advisors. Amid 2022’s market volatility, he explained that one ETF’s diversified approach to three market forces has been well received by his knowledgeable audiences.

That ETF is the Harvest Diversified Monthly Income ETF, which holds an equal weight allocation of 5 Harvest Equity Income ETFs combined with a limited amount of leverage to enhance yield. Wysocki explained that one of the key elements of this ETF that resonate with advisors is its access to three distinct investment strategies that address structural market forces.

“Right now markets are extremely volatile, and that’s being driven by different market forces” Wysocki said. “For one, you have inflation running hot and central banks raising interest rates as a result. You also have markets moving into a ‘risk off’ position after spending 2021 with more of a ‘risk on’ bias. Underneath all that you have market performance driven by sentiment and fear, compressing the values of companies and sectors that still show strong fundamentals.

“The three strategies in HDIF play to each of those forces.”

The three investment strategies inside HDIF

Wysocki explained that while HDIF doesn’t hold any exposure to fixed income—which would be directly tied to interest rates— two of its underlying ETFs have inverse relationships to interest rates. Its US financials holdings in the Harvest US Bank Leaders Income ETF (HUBL:TSX) tend to have a positive exposure to rising interest rates. On the other hand, its utilities holdings in the Harvest Equal Weight Global Utilities Income ETF (HUTL:TSX) benefit from lowering interest rates.

“In those two ETFs you have some ‘yin and yang’ exposure to interest rates,” Wysocki said.

That ‘yin and yang’ view is echoed in HDIF’s exposures to ‘risk on’ and ‘risk off’ market environments. Its technology holdings in the Harvest Tech Achievers Growth & Income ETF (HTA:TSX) are poised to benefit from a ‘risk on’ market in which technology has been a historically strong performer. Its large-cap healthcare holdings in the Harvest Healthcare Leaders Income ETF (HHL:TSX) tend to outperform markets broadly, and the tech sector in particular, when investors shift towards a ‘risk off’ position. Those two ETFs can play off one another as market risk appetite shifts.

The final strategy, Wysocki explained, is predicated on the long-term performance of large-cap companies with dominant market shares. That is captured by the holdings in the Harvest Brand Leaders Plus Income ETF (HBF:TSX), which are chosen from the world’s top 100 brands. HBF acts as a surrogate for the US market, captured by the companies that have led it through multiple market cycles.

Why these strategies play both sides of market dynamics

Given HDIF’s positive and negative exposures to both interest rates and market risk preferences, Wysocki addressed why one ETF should hold strategies that have different exposures to market forces, and whether they wouldn’t just aggregate out flat.

“HDIF is positioned this way to act as a core,” Wysocki said. “This is a strategy that can anchor a portfolio, allowing an investor or advisor to be more tactical and overweight certain sectors based on shorter-term market conditions.”

Wysocki highlighted that the blend of exposures in HDIF have been particularly beneficial during the spiky market movements of 2022. Intra-day and inter-day swings have been more volatile, as markets process news over time and investors shift in different directions. Having this blend of strategies creates greater balance in a market that feels anything but balanced.

The additional benefit, Wysocki highlighted, is that HDIF pays out a monthly cash distribution to unitholders, generated from active covered call strategies that can monetize market volatility.   

How HDIF’s income yield fits in these strategies

While HDIF’s underlying ETF portfolios all hold equities with distinct exposures to market forces, there is another important strategy at work in each of them: equity income derived from covered call strategies.

Each of the equal weight ETFs held in HDIF employ an active covered call strategy to generate a monthly cash distribution to unitholders. Covered calls work by selling the option to buy a security, generating a premium in the process. You can learn more about covered call options here. When actively managed, covered call strategies are actually able to monetize market volatility, by taking advantage of higher option premium prices due to implied volatility.

HDIF combines five separate equity strategies that are all combined with an active call option strategy. This, with the addition of 25% leverage, means the ETF generates a significant annualized yield that—in a market when both equities and fixed income have struggled—can be an important component of total return.

“Our view is that, during certain market conditions, it makes sense to use covered calls as equity exposure,” Wysocki said. “Given the volatility that we’re seeing and market sentiment at a 30-year low, covered calls make a lot of sense. This strategy can serve as a core building block, that allows advisors or investors to really be tactical with their satellite positions, and take advantage of areas of the market where they see opportunities in the short-term or medium-term, while holding an income focused medium risk weighted ETF that combines multiple investment strategies and generates income.”

Quoted in this article

David Wysocki

By David Wysocki

Vice President National Sales
Harvest ETFs

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