HMAX ETF Review: Hamilton Canadian Financials Yield Maximizer

HMAX ETF is a new fund offered by Hamilton ETF. The fund invests in the Canadian banking sector. This fund aims to provide an attractive dividend yield (target 13%) using a covered call strategy. The strategy consists of writing call options on (50% of the portfolio) to collect premiums and maximize monthly distributions. This post discusses the strategy used and compares HMAX to ZWB from BMO (BMO Covered Call Canadian Banks ETF).

How HMAX is able to keep such high dividend yield?

HMAX offers the potential for higher monthly income due to two key factors: Firstly, HMAX engages in writing covered call options on about 50% of its portfolio. Secondly, the fund currently writes options At The Money (ATM), which sets it apart from similar funds that write options Out of The Money (OTM).

1- HMAX writes covered call options on 50% of the portfolio

From an investor’s perspective, the initial point indicates that only half of your investment portfolio will be exposed to potential growth. This portion of the portfolio operates under a covered call strategy, where the potential for capital gains is exchanged for a monthly income derived from dividends and option premiums. These premiums are earned whenever the fund sells a call option in the market.

In summary, I view HMAX as a hybrid fund. The first 50% resembles a traditional dividend fund, offering the prospect of receiving dividends and witnessing long-term portfolio appreciation. In contrast, the remaining 50% adopts a more conservative approach, primarily focused on income generation but lacking the potential for portfolio appreciation.

2- The fund is currently writing option At The Money (ATM) whereas similar funds are writing options OTM (Out of The Money).

I encourage you to refer to the table below for a clearer understanding of the second point’s significance. As shown, the HMAX fund has chosen At The Money (ATM) call options due to their superior profitability compared to Out of The Money (OTM) options. In a nutschell, this decision is driven by two critical factors. Firstly, ATM options generate higher premiums than an OTM strategy. However, it’s important to note that this choice comes with an elevated level of risk.

In options trading, risk is closely linked to the likelihood of the option being exercised by the buyer. So, in the case of OTM options, where the strike price exceeds the current stock price, the likelihood of the option being exercised is low. Conversely, with ATM options, where the strike price is very close or identical to the stock’s current price, the possibility of the option being exercised becomes more realistic.

Tables

	Premium or option price	Risk	Reward
ITM (In the money call option) Stock price > Strike price	High	High	High
OTM (Out of the money call option) Stock price < Strike price	Cheap	Low	Low
ATM (At The Money call option) Stock price = Strike price	Medium	Medium	Medium

Option premium = Intrinsic value + Time value

	ITM	ATM	OTM
INTRINSIC VALUE	YES	NO	NO
TIME VALUE	YES	YES	YES

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What is the Yield of HMAX?

According to the issuer’s website, the fund has a target yield of 13%. Upon examining the historical dividend payments, it appears that the fund has the potential to achieve, or even surpass, the specified target yield. See below the historical dividend payments made by HMAX. Currently the dividend yield is around 15%.

Amount	Frequency	Ex-Div Date	Record Date	Pay Date	Declare Date
0.1731	Monthly	3/27/2024	3/28/2024	4/5/2024	3/21/2024
0.1730	Monthly	2/28/2024	2/29/2024	3/7/2024	2/22/2024
0.1746	Monthly	1/30/2024	1/31/2024	2/9/2024	1/23/2024
0.1745	Monthly	12/28/2023	12/29/2023	1/8/2024	12/20/2023

What are the MER Fees for HMAX?

The Management Expense Ratio (MER) for HMAX is not disclosed, but there’s a noted management fee of 0.65%. Given the nature of covered call high yield ETFs, fees tend to run on the higher side and the MER could potentially be above 1%.

HMAX Sector allocation

█  Asset Management 10.6%
█  Banks 70.0%
█  Insurance 20.8%

What Does HMAX Hold?

TICKER	NAME	WEIGHT
RY	Royal Bank of Canada	22.7%
TD	Toronto-Dominion Bank	17.2%
BMO	Bank of Montreal	11.3%
BN	Brookfield Corp	11.1%
BNS	Bank of Nova Scotia	10.1%
CM	Canadian Imperial Bank of Commerce	7.6%
MFC	Manulife Financial	7.1%
SLF	Sun Life Financial	5.1%
GWO	Great-West Lifeco	4.8%
IFC	Intact Financial	4.7

BMO Covered call ETF list – Full comparison

HMAX Total Return

	1 Month	3 Months	1-Year
Total return	3.14%	4.33%	10.12%

How had Covered call ETF’s performed historically?

In historical contexts characterized by bear markets, range-bound markets, and moderate bull markets, a covered call strategy has typically demonstrated the ability to outperform its underlying securities. However, during robust bull markets, when the underlying securities experience frequent rises beyond their strike prices, covered call strategies have historically exhibited slower growth. Nevertheless, even in these bullish phases, investors typically realize moderate capital appreciation alongside the accrual of dividends and call premiums.

ZWB vs HMAX ETF

Strategy

The ZWB ETF from BMO sells out-of-the-money (OTM) call options on 50% of the stocks. The OTM strategy caps the return of the written positions at the option strike price until the option expires. Generally, for BMO ETFs, option expiries are 1 to 2 months.

ETF	% portfolio	Option strategy	Dividend Yield
ZWB	50%	OTM	6-7%
HMAX	50%	ATM	13%*

Portfolio allocation

	Big Can Banks	Insurance	Asset Management
HMAX	76.4%	14.9%	10%
ZWB	100%	–	–

ZWB (BMO Covered Call Canadian Banks ETF) and HMAX (Horizons Enhanced Income Equity ETF) cater to income-seeking investors but employ different strategies. First, ZWB uses a covered call strategy with out-of-the-money (OTM) options, potentially offering more growth but with a lower management expense ratio (MER) of 0.72%. Second, HMAX, with less than one year of existence and an undisclosed MER, writes at-the-money (ATM) options, aiming for higher immediate income. However, the MER should at the higher end, possibly around 2%. Notably, ZWB concentrates solely on banks, while HMAX offers a bit more diversification by investing in insurance and asset management companies.

Investors must consider their goals: ZWB offers growth potential with lower dividends, primarily focusing on banks. In contrast, HMAX aims for regular and higher income through diversification, although it may come with potentially higher fees. The undisclosed MER for HMAX introduces some uncertainty, and investors should weigh potential dividend income against expected expenses when making their choice.

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HMAX vs HYLD

Hamilton ETFs is the issuer of both HYLD and HMAX, but they differ in their focus and objectives. On one hand, the Hamilton Canadian Financials Yield Maximizer ETF, primarily targets Canadian banks, constituting about 75% of its portfolio. And, it aims to provide a high initial monthly yield of over 13%, achieved by writing at-the-money options and maintaining a 50% options coverage ratio. This strategy balances income and potential capital appreciation for investors looking for higher monthly income from the Canadian banking sector.

In contrast, HYLD, the Hamilton Enhanced U.S. Covered Call ETF, focuses on the U.S. equity markets and aims for an overall sector mix that is “broadly similar” to the S&P 500. Indeed, it follows a similar structure to HDIV, designed for attractive monthly income and long-term capital appreciation from a diversified, multi-sector portfolio primarily composed of Canadian covered call ETFs.

While both HYLD and HMAX seek higher monthly income, HMAX concentrates on Canadian banks, whereas HYLD diversifies across U.S. sectors. Investors can choose between them based on their preferred geographical exposure and income objectives.

HMAX vs HCAL

The Hamilton Enhanced Canadian Bank ETF (HCAL) and the Hamilton Enhanced Financials Yield Maximizer ETF (HMAX) offer distinct investment approaches in the financial sector.

HCAL provides exposure to Canada’s “Big Six” banks with 25% leverage, emphasizing growth potential and higher dividends. It also utilizes a mean reversion strategy, historically outperforming equal weight and covered call strategies. HCAL targets monthly distributions, making it appealing to investors seeking growth and income from blue-chip Canadian banks.

In contrast, HMAX focuses on attractive monthly income with a market cap-weighted portfolio of Canadian financial services stocks. It employs an active covered call strategy to reduce volatility and enhance dividend income. HMAX is suitable for investors seeking consistent monthly income, blue-chip financial exposure, tax-efficient distributions, and reduced volatility through options.

For young investors with long-term objectives, I recommend considering the Hamilton Enhanced Canadian Bank ETF (HCAL) due to its growth potential. HCAL allows younger investors to capitalize on the potential for capital appreciation and dividend growth over time. While both HCAL and the Hamilton Enhanced Financials Yield Maximizer ETF (HMAX) have their merits, HCAL’s focus on growth makes it an attractive choice for young investors seeking to build wealth over the long haul.

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HMAX NAV

Net Asset Value (NAV) is a financial term. It mean the total value of all the assets held by an exchange-traded fund (ETF) after subtracting its liabilities. In simpler terms, NAV reflects the underlying value of the ETF’s portfolio, including all the stocks, bonds, or other assets it holds, minus any expenses and debts it owes.

Frequently asked questions

Is HMAX a good investment?

To sum up, HMAX provides a well-rounded investment approach, offering a blend of growth potential and income. However, it’s essential to note that the use of At The Money (ATM) options adds a heightened level of risk. This ETF is ideal for investors comfortable with a hybrid strategy, particularly those seeking monthly income through a long-term buy-and-hold approach. Prospective investors should be aware of potential tax implications associated with dividend income. Before considering HMAX, it’s crucial to evaluate your risk tolerance, investment objectives, and alignment with the hybrid approach. Additionally, be mindful that covered call ETFs, including HMAX, can exhibit volatility and move in tandem with the underlying assets they track.

For young investors aiming for growth, a classic dividend ETF like ZEB may be a more suitable option, capitalizing on the growth potential of the banking sector. If you lean towards dividends but still want to capture 100% of the growth potential in the Canadian banking sector, ETFs such as HCAL or FIE might be better alternatives.

How often does HMAX pay dividends?

HMAX pays Dividends monthly.