It turns out that there's an entire Reddit community dedicated to investing in leveraged ETFs (r/LETFs), and they do some pretty wacky stuff with these ETFs that aren't for the faint of heart.
For those of you new to the concept of leveraged ETFs, I suggest giving this primer a read. The long story short is that these ETFs are intended to be used as short-term trading tools.
For instance, if I predict that the S&P 500 index would go up on a trading day, I could juice my returns further by buying something like the BetaPro S&P 500 2x Daily Bull ETF (HSU), which targets a daily return 2x that of its underlying index using derivatives
Now, the keyword here is daily. I cannot stress that enough. Investors who hold leveraged ETFs of the daily resetting variant over longer periods can experience highly unpredictable returns. These ETFs are also very volatile and tend to carry high expense ratios of 1% or more.
However, what if you wanted to leverage up just a bit? It turns out that there are ETFs of this nature on the Canadian market, which can be held long-term. Enter Hamilton ETFs, offering a lineup of five different "enhanced" ETFs. Let's look them over.
Hamilton ETFs overview
Hamilton ETF's current "enhanced" ETF lineup all share one similar characteristic: they deploy modest 1.25x, or 25% cash leverage. This leverage is not reset daily like those used in the BetaPro ETFs. They are much similar to traditional uses of margin via cash borrowing.
As such, these ETFs tend to avoid the sequence-of-return risk posed by daily resetting leveraged ETFs with greater leverage targets of 2x, or 200%, and also charge lower fees. For investors unable or unwilling to deploy margin on their own, the Hamilton "enhanced" ETFs could be a good alternative.
Some of Hamilton's "enhanced" ETFs also simultaneously deploy a covered call overlay to provide higher-than-average monthly income potential. This is an interesting strategy – combining covered calls with modest leverage could juice both the growth and yield potential of these ETFs.
The current lineup of Hamilton ETFs
As it stands, Hamilton ETFs' "enhanced" lineup currently comprises five ETFs, each with distinct objectives and holdings. As noted earlier, all of these ETFs deploy 1.25x, or 25% cash leverage.
- Hamilton Enhanced U.S. Covered Call ETF (HYLD): This is a unique "ETF of ETFs" product that holds numerous underlying U.S. equity ETFs, many of which provide exposure to covered call strategies on a variety of U.S. indices (S&P 500, Russell 2000, Nasdaq 100) and sectors (energy, gold miners). Overall, the sector composition of this ETF comes close to the S&P 500 index. It charges a 0.65% management fee and has a very high yield of 13.99% as of March 31st.
- Hamilton Enhanced Multi-Sector Covered Call ETF (HDIV): This is the Canadian equity counterpart to HYLD, holding a variety of mostly Canadian (but also some U.S. and global) sector covered call ETFs (energy, gold miners, financials, utilities, healthcare, tech). As with HYLD, HDIV's current sector allocation comes close to that of the S&P/TSX 60 index. It also charges a 0.65% management fee and offers a yield of 10.35% as of March 31st.
- Hamilton Enhanced Utilities ETF (HUTS): This ETF mirrors the composition of the Horizons Canadian Utility Services High Dividend Index ETF (UTIL), tracking 12 Canadian infrastructure companies. In its portfolio are not only pure-play utilities, but also telecom and pipeline stocks. It does not deploy covered calls, but does use the aforementioned 1.25x, or 25% cash leverage. HUTS charges the usual 0.65% management fee and yields 6.77% as of March 31st.
- Hamilton Enhanced Canadian Bank ETF (HCAL): This ETF used to track the Solactive Canadian Bank Mean Reversion Index but was recently changed to track a more traditional equal-weighted index of the Big Six Canadian bank stocks, which will kick in on or before April 21st. If you're a fan of Canadian banks and want enhanced exposure, this ETF provides that in a single ticker. As usual, it charges a 0.65% management fee and yields 7.59% as of March 31st.
- Hamilton Enhanced Canadian Financials ETF (HFIN): For a slightly more diversified alternative to HCAL, investors can buy HFIN, which adds another six insurance and asset management companies to round out the Big Six bank stocks. This ETF is basically a leveraged play on the top 12 financial sector stocks in Canada, tracking the Solactive Canadian Financials Equal-Weight Index TR. It also charges a 0.65% management fee and yields 6.82% as of March 31st.
This content was originally published by our partners at the Canadian ETF Marketplace.