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Hamilton Capital’s bond ETF aims for 10% yield

Published on 11-07-2023

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Writing covered calls on bond ETFs a Canadian first


Here’s something new. Hamilton Capital Partners has just launched a new ETF that focuses on writing covered call options on fixed-income securities.

There are lots of funds that write covered calls on stocks to generate above-average income. But bonds? No one in Canada has tried that before.

The fund is called the Hamilton U.S. Bond Yield Maximiser ETF. It trades on the TSX under the symbol HBND.

It invests in a portfolio of ETFs that hold U.S. Treasuries. This is an important point for investors to note: The Hamilton ETF doesn’t directly own the bonds; rather it buys units of ETFs that do. Largest positions are in the iShares 20+ Year Treasury Bond ETF (NSD: TLT) at 49.6% and the Vanguard Long Term Treasury ETF (NSD: VGIT) at 29.9%.

About 80% of the Hamilton fund’s assets are in long-term maturities (20+ years), with the rest in short- and medium-term bonds.

The manager, Nick Piquard, writes covered call options against the ETFs in the portfolio to provide extra cash flow. The goal is to generate a yield of 10% annually. Premiums earned on the sale of covered calls are treated as capital gains, which are taxed at a favourable rate in investors’ hands. Interest income earned by the bonds is fully taxable.

The fund is 100% hedged to the Canadian dollar, which Mr. Piquard said in an interview with Bloomberg removes one risk variable for investors. The management fee is 0.45%.

So, is this a good way to invest in bonds? The target yield is very attractive, but the focus on long-term bonds carries above-average risk. The longer the term to maturity of a bond, the more exposed it is to rising interest rates. If rates keep moving up, the market value of this ETF will drop.

We’ve already seen this happen. HBND began trading on Sept. 15 at an opening price of $16.01. The price has been drifting down since, as investors worry about more rate hikes from the Federal Reserve Board and the Bank of Canada if inflation doesn’t slow.

The units were trading on Nov. 6 at $15.13, a loss of 5.5% from the opening price on the first day of trading. If that were to continue, the capital loss on the purchase price would exceed the cash flow generated by the fund.

When interest rates turn down, long-term bonds will rise in value. But that may take a while. In the meantime, be prepared to incur some capital losses if you buy this fund now.

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 © 2023 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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