1. What types of investors should consider the Hamilton Enhanced Multi-Sector Covered Call ETF, or HDIV?
HDIV is designed for long-term investors seeking higher monthly income and sector diversification. The fund utilizes modest 25% cash leverage to enhance yield and return potential. At launch, HDIV had a targeted yield of 8.50%. Over time, the yield of HDIV should roughly approximate the average of the underlying funds, multiplied by 1.25x, less management fees and expenses of HDIV.
2. What are the key attributes of HDIV?
HDIV is a modestly levered fund of 7 higher yielding Canadian-listed covered call funds representing different sectors. The investment objective of HDIV is to replicate, before expenses and fees, a 1.25 times multiple of the Solactive Multi-Sector Covered Call ETFs Index (SOLMSCCT).
The fund is constructed to have a sector mix broadly similar to the S&P/TSX 60 (TSX 60), but skewed to higher yielding sectors, like utilities. While the sector mix of HDIV and the TSX 60 are broadly similar, HDIV is more diversified. For example, the 10 largest exposures within the underlying portfolios/funds held by HDIV total ~20% versus ~50% for the top 10 positions in the TSX 60. The underlying dividend yield of the TSX 60 is ~2.7%.
3. What are the benefits of owning HDIV?
Supported by modest 25% leverage, HDIV is designed to offer the following benefits to investors:
- Higher monthly income from a portfolio of higher-yielding, sector covered call strategies
- Higher potential long-term returns, by mitigating the yield/return trade off inherent in covered call strategies
- Sector exposures broadly similar to the TSX 60, but with a significantly higher yield and lower concentration risk
- Provide investors exposure to modest leverage at institutional rates, which are well below retail margin accounts
- Lower volatility and reduced risk of distribution reductions compared to individual sector covered call ETFs
- Track a Solactive index that allows investors to evaluate/compare (unlevered) returns of the portfolio
4. What is the Solactive Multi-Sector Covered Call ETFs Index (SOLMSCCT) and how has it performed?
This index measures the returns of an equal-weight portfolio of 7 sector covered call funds held by HDIV. Since inception, the SOLMSCCT index has outperformed the TSX 60, generating a total return of 9.9% versus the TSX 60 of ~9.5% per year. The 9.9% return of the SOLMSCCT index is net of all fees and expenses related to the underlying funds, but before adding modest leverage (or any fees related to HDIV). Below is the since inception performance of the index versus that of the TSX 60 (left) and the performance of the index multiplied by 1.25x (right).
5. When are monthly distributions paid and what is the tax treatment of distributions? And what are the fees?
In general, for our ETFs, the ex-dividend date is the second to last business day of a month, and the payment date for distributions is 8 business days after the ex-date. From a tax perspective, the composition of the underlying funds’ distributions will flow through to HDIV investors. Distributions from covered call ETFs generally include eligible dividends, capital gains, foreign income, and a return of capital component.
HDIV charges a 65 bps management fee (above any fees of the underlying funds). HDIV tracks the Solactive Multi-Sector Covered Call ETFs Index and adds modest 25% leverage at a lower rate than your typical margin account. Even after constituent fees and before adding modest leverage, the index outperformed the S&P/TSX 60 since its inception in 2015.
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.