If you are going to chase higher yields, you need to understand where that income is coming from. In most cases, yields pushing into the 8% to 12% range are typically the result of strategies like covered calls, leverage, or a combination of both.
Covered calls generate extra income by selling away some future upside. Leverage boosts income by increasing exposure beyond your initial investment by borrowing money.
Both can be effective, but they come with trade-offs. Expect higher fees, more volatility, and in many cases, long-term total return underperformance compared to a simple buy-and-hold index fund.
With that in mind, here are two diversified Canadian monthly income ETFs that use these strategies.
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Hamilton Enhanced Multi-Sector Covered Call ETF
The Hamilton Enhanced Multi-Sector Covered Call ETF (TSX: HDIV) is built as a diversified, income-first portfolio.
It holds a mix of sector-focused ETFs, including financials, utilities, technology, and energy. Many of these underlying holdings already use covered call strategies.
On top of that, the ETF applies about 1.25 times leverage. For every $100 invested, the fund effectively gains exposure to roughly $125 in assets. This combination is what allows the ETF to generate a high level of monthly income.
The trade-off is that upside is partially capped due to covered calls, while downside risk is amplified due to leverage. In strong bull markets, it will likely lag a traditional equity ETF. In weaker markets, losses can be more pronounced.
This is very much an income-first strategy. HDIV currently pays a 10.4% distribution yield as of March 7th.
Harvest Diversified Monthly Income ETF
The Harvest Diversified Monthly Income ETF (TSX: HDIF) takes a slightly different approach but arrives at a similar outcome.
This ETF is structured as a fund of funds. Instead of holding individual stocks directly, it owns a basket of other Harvest ETFs. Many of these underlying funds are sector-focused and already employ covered call strategies.
Examples include exposure to technology, utilities, U.S. banks, industrials, consumer staples, and even travel and leisure.
Each of these underlying ETFs typically writes covered calls on up to about one-third of its portfolio. That means roughly two-thirds of the upside remains, while one-third is used to generate income.
At the top level, this ETF also applies about 1.25 times leverage across the portfolio. As with any leveraged strategy, higher income comes with higher risk, particularly during market downturns.
There is also an active element. Harvest adjusts the allocation between the underlying ETFs rather than holding them in fixed weights. The ETF currently pays a 12.7% distribution yield.
