HDIF ETF review: Harvest Diversified Monthly Income ETF

HDIF is a relatively new fund from Harvest ETFs (created on Feb 2022). It’s a covered call ETF and its main target audience are income/dividend investors. In this post, we will be reviewing the fund’s objective, fees and performance so far.

Fund Objective

HDIF is a fund of funds. It means this ETF invests in other ETFs to provide investors with diversification across various sectors of the economy ( Healthcare, Global Brands, Technology, Utilities, and US Banks). The primary objective is to provide a higher yield than traditional dividend ETFs by using a covered call strategy.

With a covered call strategy, in addition to being paid dividends, you will also be earning premiums (when the fund issues covered calls, they earn premiums). Overall, the fund pays an attractive dividend yield usually above 9%. The ‘target yield’ that the managers plan on maintaining is 8.5% . So far, dividends have been paid monthly as planned at the targeted rate.

All the funds that make up HDIF are covered call ETFs offered by Harvest.

6 ETFs
HUTL Harvest Equal Weight Global Utilities Inc
(Top 3 holdings: Verizon, Vodafone, AT&T Inc)
HHL Harvest Healthcare Leaders Inc
(Top 3 holdings: Pfizer Inc, Eli Lilly and Co, Thermo Fisher Scientific)
HBF Harvest Brand Leaders Plus Inc
(Top 3 holdings: UPS, UnitedHealth Group Inc, McDonald’s)
HUBL Harvest US Bank Leaders Income Cl A
(Top 3 holdings: First Republic Bank, The Goldman Sachs Gr, Morgan Stanley)
HTA Harvest Tech Achievers Growth & Income
(Top 3 holdings: Microsoft, Keysight Technologies, Visa Inc)
HLIF Harvest Canadian Equity Income Leaders ETF
(Top 3 holdings: Manulife Financial Corporation, Brookfield Renewable Corporation, Canadian Utilities Limited)

Additional facts about HDIF:

– The portfolio is reconstituted and rebalanced quarterly (minimum);

– The covered call strategy is applied on up to 33% of each equity securities held in underlying portfolios.

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Can you lose money on a Covered Call ETF?

The short answer is yes. Covered call ETFs are volatile and the returns depend greatly on the performance of the underlying asset. Even if you receive generous dividends, a low price performance of the ETF can wipe out all the benefits. It’s preferable to hold these type of ETFs for the long term.

Practice example: covered call strategy

An investor has 100 shares of Company A in his portfolio. Company A’s share is worth $ 30. He anticipates a stagnation or a slight drop in its price and he is ready to sell them at the price of 26 $. He decides to sell a call with the following characteristics:

• Exercise price: $ 26, Maturity: April, Option price: $ 4, Quantity: 100

He collects the following amount: 4 x 100 or 400 $ (premium)

Two cases should be distinguished:

CASE 1: Company A’s share price rose above the breakeven point of $ 30.

Break-even point = exercise price + premium = 26 + 4 = 30

The buyer of the option will choose to exercise his right to buy and, as the seller of the call, the seller will have to sell the shares at the strike price.

During this operation:

• the seller sold his shares for $ 26, which constitutes an acceptable loss for him.
• the seller collected the amount of the premium of $ 4, which helped boost the performance of his investments (yield).

CASE 2: Company A’s share price has fallen below the breakeven point of $ 30.

The buyer of the option will choose not to exercise his right to buy and the seller will not have to sell his shares.

Thanks to this operation, the seller keeps his shares in the portfolio and he collected the amount of the premium which generated an additional return.

Quick summary: HDIF ETF review

• Higher monthly income thanks the covered call strategy;
• Diversification;
• Provide investors exposure to the 25% leverage at institutional rates, which are lower than retail margin accounts.

HDIF ETF Review: MER

The expense ratio is 0.85%. The Management expense ratio which is the total expenses was not yet published.

HDIF from Harvest vs HDIV from Hamilton

These two ETFs are very similar. Both are diversified and use the covered call strategy with 25% leverage. HDIF hold 6 ETFs all issued by Harvest, whereas HDIV holds 7 covered call ETFs from various issuers (BMO, Horizons, Harvest…etc). It’s too soon to establish a winner here, since both funds are relatively new.

HDIV did not yet publish their MER. But since the fund is made up of funds owned by various issuers, one would expect the MER to be much higher than HDIF.

How profitable are covered call ETFs?

Covered call ETF became widely popular because of the high dividend yield they offer. Fund managers market their product as a high yield / low volatility alternative to direct exposure to popular market indexes such as NASDAQ or S&P 500 or highly volatile sectors such as Gold or Oil. While these claims can be considered accurate to a certain extent, one needs to realize that the covered call strategy have also a major drawback:

• Substantially lower performance than the tracked index in bull markets. Investors who are looking for high growth will be disappointed by the covered call strategy.

In our opinion, HDIF can serve various type of investors:

– A tactical play during market corrections for growth investors;

– A mean of earning income for buy and hold conservative investors

HDIF Dividends yield and Price performance

Inception Date

Feb 11th, 2022

ETF	Div Yield
HDIF	10.59%

HDIF pays a monthly dividend.

ETF	1M %Chg	3M %Chg	1yr
HDIF	-2.15	-4.02	-0.69

HDIF ETF review: Dividend distribution

Ex-Div Date	Record Date	Pay Date	Amount
5/30/2023	5/31/2023	6/9/2023	0.0708
4/27/2023	4/28/2023	5/9/2023	0.0708
3/30/2023	3/31/2023	4/6/2023	0.0708
2/27/2023	2/28/2023	3/9/2023	0.0708
1/30/2023	1/31/2023	2/9/2023	0.0708

Sector allocation

Sector	% Allocations
Financial Services	31.8%
Healthcare	21.8%
Technology	23.4%
Comm. Services	15.0%
Utilities	13.7%

HDIF ETF review: Portfolio

ETF	Allocation
HUTL Harvest Equal Weight Glbl Utilts Inc	20.5
HHL Harvest Healthcare Leaders Inc	20.3
HBF Harvest Brand Leaders Plus Inc	20.7
HUBL Harvest US Bank Leaders Income Cl A	20.7
HTA Harvest Tech Achievers Gr&Inc	20.7
HLIF Harvest Canadian Equity Income Leaders ETF	23.3
Cash and other Liabilities	(26.2)

Asset Class

US Equity	63.5%
CDN Equity	50.4%
Int’l Equity	13.0%