In this piece, we’ll check in on a higher-yielding ETF that some retirees might find to be a good fit for the core of their TFSAs (Tax-Free Savings Accounts).
Of course, pursuing a higher-yielding security, whether it be a dividend stock, an ETF, or just about anything else, comes with its own share of strings attached. Most notably, you’re probably going to be leaving quite a bit of capital appreciation on the table. Also, odds are you’re going to pay a higher MER (management expense ratio), which is the fee you pay to the managers running the show behind the scenes of an ETF.
And if you’re looking at yield-boosting strategies, the most popular of which is implementing a covered call strategy, you could be in for a bit of yield volatility (month-to-month fluctuations in yield) as well as the undesirable effect that is capped upside.
For the most part, yield-heavy ETFs won’t let you have your cake (fatter yields) and eat it, too (substantial capital gains potential). Unless, of course, you’re looking at an ETF that uses a bit of leverage to juice total returns (including capital gains).
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A 10% yielder? It’s possible via dividends, covered calls, and mild leverage
As you may know, though, leverage is capable of pushing investors offside once the next big market pullback hits. Given the volatility that broad markets have seen to kick off November, I’d argue that investors should seek to keep some cash on the sidelines, rather than looking to lever up, either by way of margin or a leveraged ETF.
In any case, this piece will look at an ETF that makes use of what I like to refer to as “mild” leverage and a covered-call strategy, which many Canadian income-oriented ETF investors have embraced.
Of course, it’s the upfront yield that’s sure to gather crowds among investors, especially those who want to give themselves a bit of a retirement income boost. As always, there are risks to consider when swimming further into the higher-yielding waters.
Hamilton Enhanced Canadian Covered Call ETF
In my humble opinion, the Hamilton Enhanced Canadian Covered Call ETF (TSX: HDIV) can be an invaluable tool in a Canadian retiree’s toolkit. The main attraction is the 10.3% yield. By the time you’re reading this piece, the yield could be several basis points (bps) above or below 10%.
But, either way, the name is drawing attention for that colossal yield. And, for the most part, there’s really no “magic” behind getting that yield to the double digits. The ETF, which pays monthly, incorporates 25% cash leverage to give its covered call strategy an extra jolt.
The result? Fatter premium income in any given month. I’m normally not a big fan of leverage, especially for investors chasing momentum or specific technological trends.
When it comes to something like HDIV, however, which uses a very mild (at least in my view) and manageable amount of leverage to give the yield a little more spice, I can’t say I’m against it for those who understand the downsides of 25% leverage.
If you’ve been through corrections and bear markets before and can honestly tell yourself you’d keep your cool if the next plunge ends up 25% more painful than the average, perhaps the risk/reward in a security like HDIV can make sense.
Bottom line
I’ve praised HDIV as an intriguing tactical tool for income investors before. And while I wouldn’t overweight the ETF, I do think that it can add value to a retirement portfolio, provided that one gets the correct dosage!
Personally, I find 25% leverage to be a sweet spot for those who understand how to use such a double-edged sword and are comforted by the added income generation, rather than any sort of pursuit of gains, which, in my view, is where leverage is riskiest.
