Want to Generate an Attractive Monthly Income in Your RRSP or RRIF? Consider Covered Call ETFs


March 8, 2024
By Ambrose O’Callaghan

The deadline to contribute to your RRSP for the 2023 calendar year has passed. However, Canadians are now free to start fresh with their 2024 RRSP contributions. Meanwhile, a Registered Retirement Income Fund (RRIF) stipulates that investors must withdraw a set amount every year. March is a good time for retirees and those nearing retirement to review their options.

In both cases, covered call ETFs should be on your radar. Covered call ETFs are designed to deliver attractive monthly income to unitholders while hedging against broader volatility. In this piece, I want to explore how covered call ETFs work and why they can work in your RRSP or RRIF account. Let’s jump in.

What are covered call ETFs? How do they work?

Harvest ETFs is one of the largest and most experienced covered call ETF providers in Canada. Covered call ETFs generate cashflows for unitholders from a portfolio of securities with a covered call option writing strategy. Harvest launched its first ETFs in 2016 and has established itself as one of the top option writing firms in Canada. The company uses an active and flexible call option strategy aim to build high yielding ETFs that pay monthly distributions and still capture the opportunity for market growth.

The trade-off between income generation and a portfolio’s exposure to market growth opportunity is a key dynamic of call option ETFs. Harvest ETFs employ an active and flexible covered call option writing strategy. When a portfolio manager writes options on a higher percentage of the portfolio, that means that it is less exposed to market growth. Many passively managed call option ETFs write options on the same percentage of holdings each month.

However, Harvest ETFs follows an actively managed strategy that provides portfolio managers with flexibility regarding the sale of call options. For example, for our equity income ETFs, we choose to cap call option writing at 33%. Meanwhile, for our fixed income ETFs, portfolio managers can utilize the full 100% limit rate.

The flexibility Harvest ETFs affords its portfolio managers allows the company to capitalize on higher option premiums during specific market conditions through the sale of call options on a smaller portion of an ETF’s holdings.

Here’s how covered call ETFs could help power your RRSP income

Harvest ETFs’ covered call strategy seeks to deliver high monthly cashflow to its unitholders. This is where RRSP and RRIF investors may want to take notice. Harvest ETFs offers covered call ETFs in three categories: Equity Income ETFs, Enhanced Equity Income ETFs, and Fixed Income ETFs. Let’s look at some of the top performers in each of these categories.

Equity Income ETF portfolios are invested in companies that are well-established, with strong balance sheets and consistent earnings growth. The Harvest Healthcare Leaders Income ETF (HHL:TSX) is a decorated equity income ETF that has been in action for nearly a decade. This ETF offers steady income and growth opportunities from large-cap US healthcare leaders.

HHL is the largest healthcare ETF in Canada. The ETF has paid over $400 million in distribution to unitholders since inception. It last paid out a monthly distribution of $0.0583, which represents a current yield of 8.3% as at February 7, 2024.

Enhanced Equity ETF portfolios offer leveraged exposure to select Harvest Equity Income ETFs. Through the application of approximately 25% leverage, these ETFs deliver higher monthly cashflows relative to non-levered Equity Income ETFs. They also offer heightened access to market growth opportunities, however, each has an elevated risk-return profile. For example, the Harvest Tech Achievers Enhanced Income ETF (HTAE:TSX) is built to deliver enhanced income and growth opportunities by applying modest leverage to an investment in the Harvest Tech Achievers Growth & Income ETF (HTA:TSX). It offers access to the same portfolio of large-cap tech companies with enhanced monthly cashflow and growth potential.

The HTAE ETF last paid out a monthly distribution of $0.1300 to unitholders. That represents a current yield of 9.79%. Moreover, this ETF has delivered annualized growth of 54% since inception to January 31, 2024.

Harvest ETFs now offers three separate fixed income ETFs that cover the major segments of the maturity spectrum from exposure to treasury bonds and bills issued and backed by the full faith and credit of the US and Canadian government. The first of three the Harvest Premium Yield Treasury ETF (HPYT:TSX) was launched in September 2023. It constitutes a portfolio of ETFs that hold longer dated US Treasury bonds and employs up to 100% covered call writing with the aim to generate a higher yield and maximize monthly cash flow.

Since launched, HPYT has paid out distributions every month. It last paid out a monthly distribution of $0.1500 per unit.


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