GICs (Guaranteed Investment Certificates) are great for some of the more conservative investors out there who just refuse to take on the risk of losing money. Of course, in the investing world, lower risk or, in the case of GICs, no risk comes with lower rewards.
And while I think that GICs can be a great stabilizer for the risk-off portion of one’s portfolio, the lack of liquidity compared to other securities (including those that are deemed “safe”) can make them pretty tough to own, especially if we’re talking about multi-year terms.
In my view, waiting around for five years for a GIC to mature can be tough, especially if unforeseen circumstances arise suddenly and much of your capital still has some years or months left to go before you can use the funds without having to take a penalty. Indeed, for younger investors, I think that the relative lack of liquidity makes the asset class somewhat less compelling.
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GICs are great, but they aren’t for everyone
Of course, good luck finding a 3-4% yield that’s completely safe in the event of a market correction or even a crash. In my view, a cash management ETF, which is invested in ultra-short-term paper, could be the middle ground.
You’ll get the liquidity, but, of course, you’ll have to settle for a sub-3% yield (typically around 2.5%, maybe a bit more these days), which, at best, might just keep you ahead of inflation without all that much of a real return. In an era of high prices, that might be good enough.
Personally, I’m not a huge fan of GICs at today’s rates, especially since the lock-in period could mean missing out on opportunities to put dry powder to work on generational bargains (think the market plunge suffered earlier this year). Of course, your tolerance for risk will differ, and, with that, GICs can still make sense.
Hamilton Canadian Financials Yield Maximizer ETF
For investors who are willing to take on serious risk for a much higher yield, though, I believe that a product like Hamilton Canadian Financials Yield Maximizer ETF (TSX: HMAX) can make sense to take a closer look at. It’s not a stock, but a stock ETF with a covered call strategy on top.
It’s not in the same ballpark as a GIC, which is risk-free; it has its own risk/reward profile. But, at the same time, the ETF’s annual distribution yield, which currently sits at just shy of 12% at the time of this writing, is hard to pass up, even if it means having to deal with the big bumps in the road that are expected with equities or equity ETFs incorporating active covered call strategies (remember, covered calls cap upside for premium income, a worthy bet for income-focused investors).
Indeed, the Hamilton Canadian Financials Yield Maximizer ETF isn’t the only popular income ETF from Hamilton with a whopping yield. With the average TSX Index at a low point, I believe that the time couldn’t be better for Hamilton and its roster of yield-rich funds.
While something like the HMAX has been on the TSX Index for more than three years, I think that the current bullish (and frothy) climate for dividend plays, especially the financials (the banks and insurers have been tough to stop), bodes very well for a sector-based covered call ETF.
The bottom line for passive-income investors
With a heavy emphasis on Canada’s top banks, my humble opinion is that it’s really tough to bet against HMAX, which manages to give distributions a jolt without having to lever up. If the bank rally fades, though, investors should expect the yield to fluctuate (it probably won’t stay at 11.6% forever) wildly and shares to be increasingly choppy.
When it comes to the current setup for banks, though, HMAX is in a great place and might be a great fit for investors looking to bet on banks (and other financials) with a twist! Would a hint of HMAX make sense alongside GICs? Possibly. It’s all about adjusting your allocation so that your risk/reward is where it needs to be.
