Bring out the defensive unit

U.S. equity funds with a covered call strategy

For the moment, we have been given a temporary reprieve from U.S. President Donald Trump’s threat to impose a 25% tariff on all imports from Canada, but what happens next? As Ontario Premier Doug Ford said recently, we now face a period of uncertainty that may last for weeks or months.

The Chartered Professional Accountants of Canada issued a press release saying that the possibility of future tariffs remains a significant threat to the Canadian economy and trade relations with the U.S. “The potential for a trade war between the two countries carries high stakes for both nations and the global economy. Immediate diplomatic action is needed to avoid these catastrophic consequences,” said David-Alexandre Brassard, CPA Canada’s chief economist.

In November, Mr. Trump said his planned tariffs would remain in place until Canada and Mexico tightened up their border controls to stop the flood of migrants and drugs into the U.S.

Since then, it’s become clear there are more than border concerns at work. Mr. Trump has repeatedly claimed the U.S. is “subsidizing” Canada to the extent of $100 billion a year (lately that has jumped to $200 billion). He also suggests that if the Canadian economy can’t deal with the tariffs, we should become “the 51^st state”.

His starting point is to order all U.S. government departments to study U.S. trade relations, especially those with Canada, Mexico, and China. He specifically wants to eliminate long-standing U.S. trade deficits, to which Canada contributes.

We don’t know how this will play out or how long the process will take. But if it the study leads to significant tariffs on a range of Canadian exports, the implications for your investments are not good. The Canadian economy will be hit hard, and the TSX will likely get pummeled if the tariffs are eventually imposed.

So, what should income investors do? A broker I spoke with says he is advising clients to invest in U.S. equities that come in a Canadian wrapper – especially those that use covered call options to generate additional income.

“Think of it in football terms,” he suggests. “You’re sending out the defensive unit.”

The rationale is that if Mr. Trump is intent on adopting an America-first policy that includes high tariffs, the best strategy is to go along for the ride. Other policies that he has promoted, like tax cuts and deregulation, should give a boost to U.S. stocks. The market impact of tariffs is questionable, but it certainly won’t have as significant an effect on U.S. stocks as it will on the TSX.

There are several Canadian companies that offer funds that invest in U.S. stocks with a covered call strategy. One is Oakville, Ontario-based Harvest ETFs. It has more than half a dozen such funds, with current yields ranging from 6.49% to 9.87%. Here’s a look at two that we follow in my Income Investor newsletter.

Harvest Brand Leaders Plus Income ETF

Harvest Brand Leaders Plus Income ETF (TSX: HBF). This ETF invests in 20 leading companies chosen from among the world’s top 100 brands. The focus is on U.S. large caps, including Walmart, Procter & Gamble, Cisco Systems, Caterpillar, Apple, and Microsoft. The current monthly distribution is 6.5 cents per unit, to yield 7.7%.

The fund gained 13.14% in 2024. The average annual compound rate of return over the past 10 years was 8.58%. That’s a respectable number but investors should be aware that the use of covered calls boosts income but reduces potential capital gains.

The ETF was launched in July 2014 and has $530 million in assets under management. The management fee is 0.75%. HBF is the Canadian dollar hedged version. The fund is also available in unhedged (HBF.B) and U.S. dollar (HBF.U) versions.

HBF units have traded in a narrow range of $9.40 to $10.29 over the past 12 months. After a dip in early August, they have been moving higher.

Harvest Healthcare Leaders Income ETF

Harvest Healthcare Leaders Income ETF (TSX: HHL.U). This ETF invests in an equally balanced portfolio of 20 leading health service companies, including insurers, equipment manufacturers, biotechnology, and pharmaceutical. Most of the stocks are U.S. companies. Some of the top names include Abbott Laboratories, Boston Scientific, AbbVie, Agilent Technologies, and Eli Lilly. All are large-cap companies (minimum capitalization is $5 billion).

There are three investment options: HHL.U is denominated in U.S. dollars. HHL is hedged back into Canadian dollars and priced in loonies. HHL.B is also priced in Canadian dollars but is unhedged.

The fund has traded in a narrow range between $8.18 and $9.47 over the past year. Monthly distributions are US$0.06, or US$0.72 a year. Assuming that rate continues, the forward yield is 8.5%.

The fund is well suited for defensive portfolios. The U units have never lost money over a calendar year since they were launched in 2017. The average annual compound rate of return since inception is 9.2%.

A more aggressive fund

If you’re looking for a more aggressive fund that employs the same strategy, check out the Harvest Tech Achievers Growth & Income ETF (TSX: HTA). As the name suggests, it invests in 20 leading U.S. tech companies (Salesforce, Adobe, Oracle, etc.). It gained 23.62% in the year to Dec. 31 and has an average annual profit of 15.83% since inception. The monthly distribution is 14 cents per unit ($1.68 per year) for a yield of 8.8% at the recent price of $19.15. Caution: This is a more volatile fund than the two previously mentioned and is vulnerable to large losses if the tech sector pulls back. The fund lost 32.2% in 2022.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

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Notes and Disclaimer

Content © 2025 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.

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