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There are a great deal of misconceptions about how High Yield ETFs work here in Canada. In this video, we take a look at 3 of the most frequently misconstrued realities, and look at how HMAX produces a 13%+ circulation. Thank you to Hamilton for sponsoring this video!
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Lots of misunderstanding out there when it comes to how High Yield ETFs generate enough cash flow to pay the distributions. Some do it well, others don’t. In this video, I address three specific inaccuracies I hear all the time about how these funds work. Enjoy the video.
Very good overview.
I like the BNS strategy you used but I have further questions. In a rising market, selling at-the-money options will frequently result in you being assigned (forced to sell the underlying stock,) thereby forcing you to have to buy more stock (either the same company or another one) next month, eg. if BNS rises quickly to $75+, the option holder will exercise it. How does Hamilton expect to deal with the drag that will cause on the fund? Or do they only do this when they believe the stock will be in a small downtrend? It’s all pretty dicey I think.
that’s why they are selling options on 50% of the portfolio, i.e. trading upside potential for income certainty.
The other concern is if the shares are called away before the ex-dividend date then they lose the dividend. 🙁
I bought some HMAX to see how it does. I’m always Leary of covered calls and split funds. I have some others; most are doing okay. I use their income to buy stocks with a bit more of. balance between growth and income. I still don’t totally trust them because it involves managers making ‘gambles’ I guess. I would not want to be 100% in covered calls and split funds….paetially because it’s fun to buy companies I like. ” I own some A&W; let’s go there for dinner!” for example.
Not sure where the “gamble” is in selling CCs. It’s considered a rather conservative strategy.
Robert, I agree in that holding a “hybrid” portfolio gives peace of mind. Diversification is Queen, and peace of mind. So a hybrid is a sort of diversification strategy, so it brings peace of mind. Working on bringing the weighting to each investment at 5% or so, that also brings peace of mind. You still get to use the cash generated from ETF, split corps to buy stock or whatever of preference. Thank for your comment Robert. There are a few really thoughtful ones as well in the comments. A really important topic. 👍🇨🇦🍁📈
Sir you forgot to mention what happens when the stock price goes above the at the money call and what the impact that has on the NAV.
Would of been a better video if it wasn’t sponsored tbh can’t take this seriously
This is a great video, well explained. But I still wonder about it. I mean, this yield sounds too good to be true. SNP (and likely cdn financial sector) average return well under 13 percent, so doesn’t this pretty much guarantee a loss of capital equal to the difference? It seems like they’re offering the proverbial free lunch. I’ve invested in some CC ETFs already but eight of the ten I bought last year are down signficantly, and I’m wondering if I messed up.
Hope your not taking advice some so guy on YouTube that is not a licensed advisor and his channel as stated is for entertainment purposes.
He explained in the video (including the math) how that difference of the fund’s higher yield vs the lower dividends of its holdings, is generated. (If that is what you mean.)
@Paulina Nelega No, that’s not what I meant. I might buy this one myself. Just saying some YouTube gurus don’t really have proper financial training and are making tons of money giving advice.
@RenosVids My reply was directed to OP (Zxborg).
Thanks Marc, always appreciate your insights and clear explanations.
I’m really excited about this ETF, bought in the day it came out. Can’t wait to see how it prefoms.
Great informative video Mark, well done.
Hi Marc, Liked the video, but I was left with two questions that I see other people have already asked, but remain unanswered by you. Do you respond to questions in the comments? The questions are:
1. How does one tell “good” ROC from “bad” ROC? Seems pretty essential to know the difference.
2. If an ETF like HMAX is using at the money covered calls, even at 50%, then in a rising market don’t they have to buy back their optioned positions the next month at a loss (ie, at a higher price than what they just sold in the option)?
Great questions. I’ve been asking other utubers the same questions but no one had replied
Thank you I appreciate your info. The problem is that these funds are so new that we don’t know if they will be better than non covered call etfs. When I looked at investing in covered call etfs I researched BMO’s as they have been around for a longer period of time and for most part they have a non-covered call etf in the same sector. Compare for example the total return over 5 years for ZWC vs ZDV. ZDV (not covered call) has an an over 18% higher total return. ZWB vs ZEB – ZEB over 16% higher total cumulative return. And 5 years really isn’t that long of a period. Also wonder what the fees will be on this? Will they have trading fees? So unless you need the income I can’t see why you would invest. Sacrificing return for yield should only be for a small group of people – maybe retirees or those who want to live off distributions. Otherwise why sacrifice return?
The BMO products are a little different. They are not leveraged (less yield), and I believe they write most, if not all, against their holdings (limits upside). These new covered calls etfs are usually 25% leveraged, and they only write a percentage of their holdings to capture some upside. The fee is just managment fee which is in the unit price, and it is pretty reasonable. It really just comes down to cash flow. I understand your total return comparison, but if you hit a lost decade where the market goes nowhere (happened before), you are secrewed if you are about to retired or is retired.
I like your comment and agree with everything you said except HMAX doesn’t use any leverage right now. Go back and watch the video as Marc specifically said no leverage on HMAX
Marc, I too am old fashioned and like seeing assets growing over time. WRT to Pat’s second comment, how does an investor determine if the portfolio is earning close to what it is paying out? With a single company you can look at the earnings per share and compare it to the dividend paid per share to see this info. Is similar data published on the fund’s website or do we have to look at each holding and do our own math?
ETFs have to publish their financial results every Quarter just like publicly traded companies
Thank you so much for taking the time to explain this, Marc. I’ve been trying to put together this puzzle for quite sometime now but it opens up more questions than answers. I really appreciate this. Would it be correct to assume that by selecting at-the-money calls gives a higher probability that it will be exercised? Thank you for sharing your wisdom! All the best to you and Brandon!
Love what you and Brandon do, as far as what trolls in comments say or write, paying attention to their comments is what they want. To piggyback on my first comment as far as hmax or hyld go, growth of these etf is minimal, for a growth investor this should be a compliment to a portfolio and not a majority of portfolio, where as a retiree who is focused on income and conservation of capital this maybe a great option , only problem with this fund in comparison to hyld or the Zwc/ZwB/zwu it is hard to monitor it’s passed progression as it is too new as a fund.
If have a technical question for you (I trade options BTW), why is it when market is in a downturn all CC etf’s are also in the red, meaning as an option seller who sells ITM or ATM calls at expiration in a down market I ll capture all the premium where as in a green day I’ll probably buy the option down and out , to capture some premium, but I have made gains in overall options portfolio on red days, but these funds do the opposite…any insight as to the why?
I am a retired. I liked your content in this video. Please compare HMAX or similar etf with back tested results. I also follow the average Joe investor. So something similar in Canadian etfs
Well done Marc, I was wondering how HMAX was able to achieve the yield it was seeking with the 50% ATM strategy. The mechanics part of this video was quite informative. Thank you.
Has to be said a million times – TOTAL RETURNS – never take your eye of it. Each year I review the holdings to determine which holdings are BOTH paying me nice dividends AND AND AND at the same time preserving (ideally increasing) the underlying value of the investment. And I move in OR OUT of investments accordingly.
Great video. Have recently realigned my RRSP portfolio to include some of these type of funds from Hamilton and Harvest and welcome the extra income as I am now drawing down my RRSP. Wish you would have covered off the aspect of leverage as some of these funds include that to further enhance the yield.
Always appreciate Marc’s perspective, even with sponsored videos you can tell he always maintains a non-biased, genuine stance to provide useful information and support for the viewers. HMAX in particular was one CC etf I had concerns about, thanks for this video
Amazing information on these ETF’s. Thank you so much for making my investment strategy better each time I watch.
Hey Marc, I forwarded your video to a retired DIY’er investor. He was actually thinking of purchasing HMAX. I offered to put his question to you, as I am sure more than one of your viewers has the same question. Here it is:
“I have been looking at HMAX obviously the yield is attractive and lack of leverage is a plus for me.
Can the at the money options result in being called more frequently with even a small rise in price?
Would you then have to buy back the holding at a higher price, to maintain dividend flow therefore leading to a capital loss?
Or am I missing something?” Marc, thank you again for another superb presentation, hope the audience didn’t think you were too “testy.” ☺ 🇨🇦🍁📈
Excellent video! This needs to be shown to all the people who say “these funds are ALL dividend traps” etc. No they are not. They are designed like this and they simply work! Covered calls are only on 50% of the portfolio ( for HMAX as an example) so that leaves the other 50% for growth. Hamilton is an amazing and very smart fund manager and I will continue to buy, hold and dollar cost average into their funds that I like. Thanks again for this video. I agree with it.