As of September 2023, the JPMorgan (NYSE:JPM) Equity Premium Income ETF (JEPI) has established itself as a juggernaut in the actively managed ETF space in the U.S., boasting just over $29 billion in assets under management, or AUM.
Investors have been drawn to JEPI largely due to its resilient performance in 2022, as well as its attractive portfolio characteristics: blue-chip dividend-paying equities, lower volatility, a high annual yield, and the promise of monthly income.
However, for Canadian investors, acquiring shares of JEPI isn't as straightforward. The process often involves either using a currency conversion strategy like Norbert's Gambit or swallowing a hefty fee from a brokerage for currency conversion. This creates not only an additional layer of complexity but also potentially erodes some of the gains due to conversion costs.
Fortunately, Canada's own ETF providers have stepped up to offer compelling alternatives that save investors the hassle and cost of currency conversion. Hamilton ETFs, for example, have come up with some notable income-focused ETFs that aim to mimic many of the characteristics that have made JEPI so popular. Here's a closer look at two such options.
Hamilton Enhanced Multi-Sector Covered Call ETF (TSX:HDIV)
HDIV is an "ETF of ETFs" that seeks to provide monthly distributions while targeting a higher-than-average annual yield. To achieve this, the ETF currently "wraps" eight other Canadian listed income focused ETFs, many of which employ a covered call strategy. As of August 31, the list includes:
- CI Energy Giants Covered Call ETF (TSX:NXFu) (NXF): 21.2%
- Hamilton Canadian Financials Yield Maximizer ETF (TSX:HMAX) (HMAX): 19.1%
- Hamilton Enhanced Canadian Financials ETF (TSX:HFIN): 18.4%
- Harvest Tech Achievers Growth & Income ETF (TSX:HTAu) (HTA): 17.2%
- Horizons Gold Producer Equity Covered Call ETF (TSX:GLCC): 16.8%
- Harvest Healthcare Leaders Income ETF (TSX:HHLu) (HHL): 16.4%
- Hamilton Utilities Yield Maximizer ETF (TSX:UMAX) (UMAX): 12.2%
- Hamilton Enhanced Utilities ETF (TSX:HUTS): 4.0%
The ETF is designed to have a sector composition similar to that of the S&P/TSX 60 index, which involves a focus on financial and energy sector equities. As an "enhanced" ETF, HDIV also deploys 1.25x, or 25% cash leverage via margin to enhance yields and potential returns.
As of August 31, the ETF is charging a management fee of 0.65% against an annualized yield of 10.94%. So far, it has accrued $367 million in AUM.
Hamilton Enhanced U.S. Covered Call ETF (TSX:HYLD)
HYLD is the U.S. equity focused variant of HYLD, with a sector composition similar to that of the S&P 500 (a focus on technology and healthcare equities). Like HDIV, HYLD utilizes an ETF of ETFs wrapper approach, but differs in that it actually holds some U.S. listed ETFs. As of August 31, the list includes:
- JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ:JEPQ)(JEPQ): 19.7%
- JPMorgan Equity Premium Income ETF (NYSE:JEPI) (JEPI): 19.2%
- Horizons NASDAQ-100 Covered Call ETF (TSX:QQCC): 17.7%
- Horizons US Large Cap Equity Covered Call ETF (TSX:USCC): 17.6%
- Global X S&P 500 Covered Call ETF (NYSE:XYLD)(XYLD): 12.2%
- Harvest Healthcare Leaders Income ETF (TSX:HHLu) (HHL): 12.0%
- Global X NASDAQ 100 Covered Call ETF (NASDAQ:QYLD) (QYLD): 9.3%
- Global X Russell 2000 Covered Call ETF (NYSE:RYLD) (RYLD): 9.0%
- Horizons Gold Producer Equity Covered Call ETF (TSX:GLCC) (GLCC): 6.6%
- CI Energy Giants Covered Call ETF (USD Hedged) (TSX:NXFu) (NXF): 2.6%
By buying this ETF, you get exposure to not only JEPI, but also some other highly popular U.S. covered call ETFs like QYLD. Keep in mind that the upside potential of these ETFs is constrained by their strategy, which forgoes some capital appreciation in exchange for high income.
HYLD has so far been more popular than HDIV, having accrued just over $468 million in AUM. As of August 31, investors are looking at an annualized yield of 11.71% along with a 0.65% management fee. Like HDIV, it also deploys 25%, or 1.25x cash leverage.
Are these ETFs worth it?
Whether or not HDIV and HYLD are worth investing in depends on your investment approach and needs. If you're the type of investor who prefers an "all-in-one" solution for income, these ETFs offer a compelling package, particularly for those who don't want to delve into the intricacies of portfolio management.
Speaking personally, I don't find the need to invest in HDIV. All of its underlying ETFs are Canadian listed and can be easily purchased individually at zero-commission brokers. This allows for greater control over the assets in my portfolio, potentially saving on management fees.
For HYLD, the story is a bit different. If you have two or more of its underlying U.S. ETFs on your watchlist but have been hesitating due to the complexity and costs of currency conversion, HYLD could be a viable solution. With its diversified U.S. focus and a yield that's competitive, it addresses several key needs for Canadian investors looking south of the border for income opportunities.
However, it's important to understand the trade-offs involved with these ETFs. The use of covered calls in the strategy does cap the upside potential, which means that during strong bull markets, these ETFs may underperform their non-covered counterparts.
Additionally, both ETFs employ 25% cash leverage via margin, a feature that could enhance both upside and downside potential. While this leverage may boost yield, it also amplifies risk, so investors should be cautious and fully understand the implications before diving in.
This content was originally published by our partners at the Canadian ETF Marketplace.