“We’ve had a 20-plus per cent correction in the market, and we’re facing a challenging macro backdrop,” Paul MacDonald, chief investment officer and portfolio manager at Harvest, told Wealth Professional in an interview following the launch. “So we think it’s a little bit more opportunistic to launch these enhanced strategies now versus earlier in the year.”
Rather than use leverage, this new wave of enhanced-yield ETF products pouring into the Canadian space boost their return potential by using active covered-call strategies on the underlying investments. That kind of approach certainly makes sense in a year like 2022, says Martin Pelletier, senior portfolio manager at Wellington-Altus Private Counsel.
“We’ve traded options for many years, and having an overlay on top of an ETF can be a great all-in-one solution,” Pelletier told Wealth Professional. “We’ve used enhanced ETFs within our toolbox and I think at certain times, it can be a good strategy.”
During times of market stability and complacency, Pelletier says, other strategies like buying put protection may be more compelling as yields on options writing tend to be lower. But an environment like 2022 offers more opportunity for investors to harvest volatility through options writing.
Within his own portfolio, Pelletier says he’s used ZWU, which is a covered-call write on utilities. Compared to consumer discretionary firms whose earnings and revenues tend to plummet during unfavourable market and economic conditions, utility firms are typically more defensive as they offer high dividends and a lower correlation to the broad market.
