Just over three years ago, we launched the Hamilton Enhanced Multi-Sector Covered Call ETF (HDIV), Canada’s first enhanced “all-in-one” covered call ETF. HDIV invests in a portfolio of our YIELD MAXIMIZER™ sector covered call ETFs and has a sector mix “broadly similar” to the S&P/TSX 60. We believe HDIV is most attractive to investors seeking a higher income alternative to the S&P/TSX 60. As it passes its 3-year anniversary, we wanted to share some of HDIV’s major highlights:
- Since inception, HDIV has consistently outperformed the S&P/TSX 60 Index (see chart)
- Outperformed the S&P/TSX 60 in each of its three years
- Seven distribution increases
- Attractive yield, currently 11.98%[2]
- Assets under management (AUM) of over $450 million[3]
| Name | Ticker | Yield | 3 Mo | YTD | 1 Year | 3 Year* | Since Common Inception* | Since Inception* | Inception Date |
| Hamilton Enhanced Multi-Sector Covered Call ETF | HDIV | 11.98% | 9.70% | 15.50% | 20.39% | 11.37% | 12.86% | 12.86% | 2021-07-19 |
| S&P/TSX 60 Total Return Index | TX60AR | 3.24% | 7.00% | 11.30% | 15.49% | 7.76% | 8.58% | 8.00% | 1999-03-08 |
*Annualized
HDIV — Outperforming the S&P/TSX 60 with Yield of 11.98%2
HDIV’s success is rooted in two factors. First, the selection of ETFs in this fund-of-fund structure contributed to its outperformance and added very important diversification during periods of volatility. Second, its innovative approach to covered call investing. By applying modest 25% leverage to its diversified holdings, HDIV has been able to generate higher monthly income and participate in more upside growth, mitigating some of the yield/return trade-off inherent in traditional covered call strategies. This structure has proved resilient since HDIV’s inception, delivering growth and attractive monthly distributions to investors. Notably, HDIV has an annualized return of 12.86%1 and is outperforming the S&P/TSX 60 by over 4% per year (and +16% cumulative total outperformance over 3 years, with HDIV rising 44.4% versus the S&P/TSX 60 up 28.4%).
1. Greater Diversification and Breadth
To achieve its investment objective of attractive monthly income and long-term capital appreciation, HDIV invests largely in our sector-focused YIELD MAXIMIZER™ ETFs. The result is an overall sector composition that is similar, but not identical to the S&P/TSX 60 index. In HDIV, we uniquely position its multi-sector portfolio to allow for greater diversification and provide investors with a convenient all-in-one solution with enhanced growth potential through its modest leverage of 25%.
One of the limitations with the Canadian equity markets versus the U.S. and other large markets is the lack of breadth and outsized weightings in certain sectors, namely financials, commodities, and utilities. These sectors often lack breadth and can be dominated by a handful of companies. For example, the Canadian technology sector accounts for ~10% of the index but is heavily concentrated in just 4 companies (the largest being Shopify and Global Constellations). To address this lack of breadth and provide HDIV investors with added diversification, HDIV achieves its technology exposure by investing in the much larger U.S. technology sector through our Hamilton Technology YIELD MAXIMIZER™ ETF (QMAX). Similarly, we opted for a U.S. healthcare allocation through the Hamilton Healthcare YIELD MAXIMIZER™ ETF (LMAX) instead of exposure to the Canadian industrials sector. Ultimately, HDIV aims to maintain a sector mix similar to that of the S&P/TSX 60, while providing greater diversification/breadth (see table below).
| Sector | HDIV | S&P/TSX 60 | Difference | ||
| Financials | 32.5% | 34.6% | (2.1%) | ||
| Information Technology | 10.5% | 8.7% | 1.8% | ||
| Energy | 18.0% | 17.9% | 0.1% | ||
| Industrials | 2.2% | 12.5% | (10.3%) | ||
| Consumer Staples | 0.0% | 4.7% | (4.7%) | ||
| Communication Services | 6.6% | 3.6% | 3.0% | ||
| Materials | 12.1% | 10.3% | 1.8% | ||
| Consumer Discretionary | 2.1% | 3.7% | (1.6%) | ||
| Utilities | 5.5% | 3.1% | 2.4% | ||
| Real Estate | 2.0% | 0.7% | 1.3% | ||
| Healthcare | 8.6% | 0.0% | 8.6% | ||
| Total | 100% | 100% | |||
As at July 31, 2024. Source: Bloomberg, Hamilton ETFs
2. Benefits of Modest 25% Leverage
By selling call options on a portion of the underlying holdings in return for a cash premium, covered call ETFs generally offer higher yields and lower volatility at the expense of some limited upside potential. HDIV utilizes modest 25% leverage to improve this trade-off and provide two key benefits: (i) higher growth potential, and (ii) even higher monthly income. For every $100, HDIV borrows an additional $25 to reinvest in its portfolio and amplify the fund’s overall yield and growth potential. While the modest leverage does increase volatility, the lower volatility of HDIV’s underlying covered call ETFs help dampen the impact. The benefits of modest 25% leverage have contributed to HDIV’s outperformance and, in our view, results in an attractive combination of income and growth.
Income vs. Growth — To DRIP or Not to DRIP?
Covered call ETF investors typically emphasize generating higher monthly cashflows from their investments and focus less on the total growth of their portfolio. For these types of investors, a simple cash distribution is often the best option. However, investors who are looking for long-term wealth accumulation and to benefit from the power of compounding might consider a distribution reinvestment plan (“DRIP”). In a DRIP, an investor receives additional units of the ETF in lieu of the monthly cash distributions. Below, we compare the aggregate value today of two $100K portfolios invested in HDIV (since inception), one that received cash distributions and one that enrolled in a DRIP.
In our view, HDIV continues to be an attractive ETF for investors seeking a higher income alternative to the S&P/TSX 60 with greater diversification. Investors looking for a higher yielding alternative to the S&P 500 could consider HYLD/HYLD.U (Hamilton Enhanced U.S. Covered Call ETF), which has a current yield of 12.64%/12.25%[2] (respectively).
| Name | Ticker | Yield | 3 Mo | YTD | 1 Year | Since Inception* | Inception Date |
| Hamilton Enhanced U.S. Covered Call ETF | HYLD | 12.64% | 11.23% | 18.15% | 21.42% | 6.12% | 2022-04-02 |
| Hamilton Enhanced U.S. Covered Call ETF (USD) | HYLD.U | 12.25% | 11.46% | 18.90% | 22.67% | 7.18% | 2022-04-02 |
*Annualized
For additional information on our suite of YIELD MAXIMIZER™ ETFs, please CLICK HERE.
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A word on trading liquidity for ETFs …
Hamilton ETFs are highly liquid ETFs that can be purchased and sold easily. ETFs are as liquid as their underlying holdings and the underlying holdings trade millions of shares each day.
How does that work? When ETF investors are buying (or selling) in the market, they may transact with another ETF investor or a market maker for the ETF. At all times, even if daily volume appears low, there is a market maker – typically a large bank-owned investment dealer – willing to fill the other side of the ETF order (at net asset value plus a spread). The market maker then subscribes to create or redeem units in the ETF from the ETF manager (e.g., Hamilton ETFs), who purchases or sells the underlying holdings for the ETF.
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[1] Since inception on July 19, 2021. As at July 31, 2024. Source: Bloomberg, Hamilton ETFs
[2] An estimate of the annualized yield an investor would receive if the most recent distribution remained unchanged for the next 12 months, stated as a percentage of the price per unit on July 31, 2024. The yield calculation excludes any additional year end distributions and does not include reinvested distributions.
[3] As at July 31, 2024. Source: Hamilton ETFs
[4] The graph illustrates the impact to an initial investment of $100,000. It is not intended to reflect future returns on investments in HDIV. The index performance return is for illustrative purposes only and the returns do not reflect any management fees, transaction costs or expenses. Investors cannot invest directly in an index.