It’s true that, as a group, utility stocks are considered defensive. Their revenues are often supported by regulated rate frameworks, capped returns, and essential demand. People still need electricity, natural gas, and water whether the economy is booming or in recession.
But there is still meaningful variation within the sector. Not long ago, a well-known Canadian renewable utility shocked investors by slashing its dividend, sending the stock sharply lower in a single day. When you own an individual name, that kind of event can do real damage to your portfolio.
One way to reduce that company-specific risk is to own a basket of utilities instead of betting on just one. You may give up some upside in a strong rally, but you significantly lower the odds of suffering a dramatic wealth haircut from a single dividend cut or regulatory issue.
Utility investing also doesn’t have to mean settling for modest yields. Some exchange-traded funds (ETFs) layer in structural enhancements such as covered calls or modest leverage to boost income. That added yield comes with higher fees and greater volatility, so it’s important to understand the trade-offs before investing.
With that in mind, here are two Canadian utility-focused ETFs from Hamilton ETFs that stand out for investors seeking steady income with a defensive tilt.
Source: Getty Images
Leveraged utilities
My first pick is Hamilton Enhanced Utilities ETF (TSX: HUTS). It tracks the Solactive Canadian Utility High Dividend Index, a rules-based benchmark of equally weighted Canadian utility stocks.
One thing worth highlighting is that the definition of “utilities” here is broader than just traditional power, gas, and electricity providers. Yes, those regulated rate-base companies are included. But HUTS also includes telecommunications companies and pipeline operators.
While telecoms and pipelines don’t operate under the exact same regulatory frameworks as electric utilities, they provide essential services. Canadians still need wireless service, internet access, and energy transportation regardless of the economic cycle. As a result, these businesses often share similar characteristics: steady cash flow, high capital intensity, and recurring revenue.
What makes HUTS unique is its use of 1.25 times leverage. In simple terms, for every $100 of investor capital, the fund borrows an additional $25 and invests $125 into the portfolio. That amplifies both potential returns and potential losses. In strong or stable markets, leverage can boost total return and income. In downturns, it can magnify drawdowns.
Right now, HUTS pays a 6.17% distribution yield with monthly payouts. That is meaningfully higher than most plain-vanilla utility ETFs, but you are taking on additional risk to earn it.
Covered Call Utilities
If leverage makes you uncomfortable, that’s completely reasonable. There’s another way to increase yield from utilities without meaningfully increasing volatility, although it does cap upside. That approach is used in Hamilton Utilities YIELD MAXIMIZER ETF (TSX: UMAX).
UMAX also holds a portfolio of Canadian utility-related stocks. Like HUTS, it expands beyond just electric and water utilities to include telecommunications names. In addition, it can include waste management businesses and even Canadian railroads, which share infrastructure-like characteristics and stable demand profiles.
Instead of borrowing money, UMAX uses a covered call strategy on roughly 50% of the portfolio. Specifically, it sells at-the-money call options on half of its holdings. A covered call means the fund owns the stock and sells someone else the right to buy it at a set price. If the stock rises above that price, the upside on that portion is capped. In exchange, the fund collects option premiums upfront, which are distributed to investors as income.
The trade-off is clear. You give up part of the upside potential on half the portfolio, but you receive a much higher and more consistent cash flow stream. That is why UMAX’s yield is currently even higher than HUTS at 14.26%.
Just remember: with that level of yield, you should not expect much price appreciation over time. Most of your return is likely to come in the form of monthly distributions, not capital gains.
