UMAX

Maximizing Returns with UMAX: Inside Hamilton’s High-Yield Utilities ETF

Investment Objective

Hamilton introduced a new ETF called UMAX, which focuses on the utilities sector (UMAX was launched June 14th 2023). This ETF is designed to provide investors with attractive monthly income while offering exposure to a diversified portfolio of utility services equity securities primarily listed in Canada and the U.S. UMAX aims to reduce volatility and enhance dividend income by employing an active covered call strategy. This post is also available in Video format.

Unlike some other income ETFs, UMAX does not utilize leverage. However, it still aims to generate higher monthly income for investors. It offers exposure to blue-chip Canadian utilities, including pipelines, telecoms, and railways. By implementing the covered call strategy, UMAX seeks to enhance monthly income and reduce volatility. Currently, the coverage through covered calls is approximately 50%.

UMAX targets a yield of 13% or more, with monthly distributions to provide consistent income.

Investors can access UMAX, along with other Hamilton ETFs, on the Toronto Stock Exchange (TSX). These ETFs can be included in various portfolios, such as RRSP, RRIF, DPSP, RDSP, FHSA, RESP, and TFSA. Additionally, for investors interested in a Dividend Reinvestment Plan (DRIP), they can contact their individual brokerage for setup details.

Similar funds from Hamilton ETFs

In addition to UMAX, Hamilton offers other notable ETFs in their lineup, including HMAX Hamilton Canadian Financials Yield Maximizer and HYLD Hamilton Enhanced U.S. Covered Call ETF.

HMAX is designed to maximize yield within the Canadian financials sector. It aims to provide investors with attractive monthly income by investing in a diversified portfolio of Canadian financial companies. On the other hand, HYLD focuses on the U.S. market and utilizes a similar covered call strategy to generate income and reduce volatility. It seeks to provide enhanced yield potential by investing in a diversified portfolio of U.S. securities, primarily in the large-cap segment.

BMO Covered call ETF list – Full comparison

Review HYLD: Hamilton Enhanced U.S. Covered Call ETF

Review of HMAX: Hamilton Canadian Financials Yield Maximizer

How UMAX is able to set such high dividend yield target?

According to the issuers’ website, UMAX is able to provide higher monthly income for two reasons:

  1. UMAX writes covered call options on approximately 50% of the portfolio
  2. The fund is currently writing option At The Money (ATM) wheras similar funds are writing options OTM (Out of The Money).

UMAX vs ZWU vs HUTE ETF

Strategy

UMAX: This ETF allocates 50% of its portfolio and uses at-the-money (ATM) options. It offers a dividend yield of approximately 13%* and does not employ leverage.

ZWU: Similar to UMAX, ZWU also allocates 50% of its portfolio, but it utilizes out-of-the-money (OTM) options. It has a dividend yield of approximately 8.6% and does not employ leverage.

HUTE: HUTE allocates 33% of its portfolio using OTM options and offers a dividend yield of 9.8%. It employs 25% leverage to amplify returns.

% potfolioOption
strategy
Divdend
Yield
approx
Leverage
UMAX50%ATM13%*No
ZWU50%OTM8.6%No
HUTE33%OTM9.8%25%
Covered call strategy

CIBC investors' edge

ATM vs OTM Options

I invite you to consult the table below to understand the difference. As you can see, the UMAX fund has chosen to issue ATM call options because they are more profitable than OTM options. First, the premium is higher than that generated by an OTM strategy. However, the risk of loss is also higher.

The risk for an option always corresponds to the probability that the buyer will exercise it. If the strike price is higher than the current price (OTM), the chances of the option being exercised are low. However, the probability of the option being exercised is more plausible for an ATM option where the strike price is very close or equal to the stock’s current price.

Table

Premium
or option
price
RiskReward
ITM (In the money call option)
Stock price > Strike price
HighHighHigh
OTM (Out of the money call option)
Stock price < Strike price
CheapLow Low
ATM (At The Money call option)
Stock price = Strike price
MediumMediumMedium
Typical expected result when writing a covered call option

Video

Summary table Risk vs Benefits of a covered call strategy

AspectDescription
StrategySelling call options on a security already owned in the portfolio
NameCovered call strategy
RiskPotential for limited upside if the stock price rises above the strike price
BenefitGenerates additional income through premium payments received from selling call options
GoalTo earn income from stock holdings while potentially reducing downside risk
UseOften used by investors who are willing to sell their stock at a certain price if it reaches that level
OutcomeIf the stock price stays below the strike price, the option expires worthless, and the investor keeps the premium payment. If the stock price rises above the strike price, the option buyer may exercise their right to buy the stock, and the investor must sell the stock at the strike price, but still keeps the premium payment.

UMAX Portfolio of stocks

cibc investors' edge
TICKERNAMEWEIGHT
BCEBCE Inc7.7%
TRPTC Energy Corp7.7%
ENBEnbridge Inc7.7%
RCI/BRogers Communications Inc7.7%
FTSFortis Inc/Canada7.7%
EMAEmera Inc7.7%
PPLPembina Pipeline Corp7.7%
WCNWaste Connections Inc7.7%
CNRCanadian National Railway Co7.7%
HHydro One Ltd7.7%
TTELUS Corp7.7%
NPINorthland Power Inc7.7%
CPCanadian Pacific Kansas City Ltd7.7%

Management fees

Management Fee0.65%

UMAX Dividends

AmountAdj. AmountEx-Div DateRecord DatePay DateDeclare Date
0.17100.17105/31/20245/31/20246/7/20245/24/2024
0.17100.17104/29/20244/30/20245/7/20244/23/2024
0.17160.17163/27/20243/28/20244/5/20243/21/2024
0.17150.17152/28/20242/29/20243/7/20242/22/2024
0.17210.17211/30/20241/31/20242/9/20241/23/2024

Sector Allocation

UMAX ETF provides a diversified portfolio with sector allocations designed to capture opportunities across different segments of the market. The fund’s sector allocation includes Communication Services (23.5%), Pipelines (23.1%), Industrials (23.9%), and Utilities (30.9%).

Communication Services focuses on telecommunications, media, and entertainment. Pipelines offer exposure to essential energy infrastructure. Industrials cover manufacturing, transportation, and construction. Utilities provide stability and income generation potential.

The UMAX ETF’s sector allocation aims to balance growth potential, income generation, and stability, offering investors a well-rounded investment approach. As with any investment, thorough research and consideration of personal circumstances are recommended. Consulting with a financial advisor is advised.

Final thought: is UMAX is the right ETF for you?

If you’re in pursuit of consistent dividend income, you’ve likely come across the UMAX ETF, which offers an alluring yield through its covered call strategy. This approach can indeed provide an attractive stream of income, but there are some key considerations to bear in mind.

Firstly, the high distribution offered by UMAX can be a double-edged sword. While it’s great for generating income, it may also increase your tax burden, so it’s wise to consult with a tax advisor to understand the implications for your specific situation.

Secondly, it’s important to understand that the covered call strategy comes with limitations. By design, it can cap the potential for growth. As highlighted in this post, roughly 50% of the UMAX portfolio is impacted by this strategy. The use of at-the-money (ATM) options is primarily aimed at boosting income, often at the expense of significant growth.

So, who is UMAX best suited for? This ETF is more aligned with investors who have a genuine need for a monthly income source and are willing to tolerate moderate volatility. If you can stomach the ups and downs and prioritize income over the potential for substantial long-term price appreciation, then UMAX may align with your financial goals.

However, it’s crucial to remember that no investment comes without trade-offs. The covered call strategy provides stability and income, but it may not deliver the same growth prospects as other investments. Your choice should depend on your unique financial circumstances, risk tolerance, and investment objectives.

In conclusion, UMAX can be a valuable tool for income-focused investors, but it’s not a one-size-fits-all solution. Consider your long-term goals, tax implications, and willingness to accept moderate volatility when deciding if this ETF is the right fit for your portfolio.