Exploring the Harvest Covered Call ETFs

Covered call ETFs have become an intriguing investment option for those seeking high yields and steady income, and Harvest Portfolios has positioned itself as a leader in this space in Canada. In this third installment of our covered call ETF analysis series, we compare six Harvest covered call ETFs across different sectors with their conventional ETF counterparts to understand how these strategies perform under varying market conditions.

1. Healthcare: HHL vs. XHC

• Harvest Healthcare Leaders Income ETF (HHL): Yield: 8.9% (as of writing). Focused portfolio of ~20 healthcare companies.
• iShares Global Healthcare Index ETF (XHC): Diversified holdings of over 100 healthcare companies.

Performance Analysis: HHL has demonstrated outperformance relative to XHC when accounting for distributions, particularly during the flat healthcare market conditions of 2022-2023. This reflects the effectiveness of the covered call strategy in generating income when capital appreciation is limited. However, the smaller number of holdings in HHL introduces higher concentration risk compared to XHC.

2. Technology: HTA vs. QQQ

• Harvest Tech Achievers Growth & Income ETF (HTA): Yield: 8.08% (as of writing). Portfolio of ~20 technology companies, with an average PE ratio of 33.0X.
• NASDAQ 100 ETF (QQQ): Broad exposure to the NASDAQ 100.

Performance Analysis: HTA’s performance matches that of QQQ when distributions are reinvested into HTA. However, if distributions are retained as income, HTA exhibits underperformance over a five-year period. Investors choosing between HTA and QQQ must weigh the importance of a consistent income stream versus long-term capital growth potential.

3. Utilities: HUTL vs. JXI

• Harvest Equal Weight Global Utilities Income ETF (HUTL): Yield: 8.09% (as of writing). Equal-weight strategy with covered call enhancements.
• iShares Global Utilities ETF (JXI): Conventional global utilities exposure.

Performance Analysis: HUTL generally underperforms JXI, but it exhibits lower volatility, making it attractive for risk-averse investors. This reduced volatility can be attributed to the stabilizing effect of the covered call strategy, which offsets some downside in bearish conditions while limiting upside during rallies.

4. REITs: HGR vs. REET

• Harvest Global REIT Leaders Income ETF (HGR): Yield: 8.74% (as of writing).
• iShares Global REIT ETF (REET): Broad exposure to global real estate investment trusts.

Performance Analysis: HGR underperformed REET, especially during the REIT bear market starting in 2022, driven by interest rate hikes and work-from-home trends. REET, with its conventional structure, weathered this period better. HGR's covered call strategy faced challenges generating income without significantly eroding capital in such a strong bear market, highlighting the strategy’s limitations during severe downturns.

5. Energy: HPF vs. IXC

• Harvest Energy Leaders Plus Income ETF (HPF): Yield: 8.93% (as of writing).
• iShares Global Energy ETF (IXC): Conventional exposure to global energy companies.

Performance Analysis: Despite the strong bull market in the energy sector from 2020-2022, HPF underperformed IXC. The capped upside potential inherent in the covered call strategy limited HPF's ability to fully capitalize on the rally, making it less ideal for investors seeking exposure to growth in the energy sector.

6. US Banks: HUBL vs. ZBK

• Harvest US Bank Leaders Income ETF (HUBL): Yield: 7.44% (as of writing).
• BMO Equal Weight U.S. Banks Index ETF (ZBK): Equal-weighted exposure to U.S. banks.

Performance Analysis: HUBL has underperformed ZBK, but the disparity is less dramatic than in other sectors. The U.S. banking sector has experienced significant volatility due to interest rate hikes and regional bank challenges, followed by a recovery amid deregulation and expectations of lower rates. Throughout these swings, HUBL managed to deliver steady distributions while preserving capital reasonably well, underscoring its appeal for income-focused investors.