Hamilton Utilities Yield Maximizer ETF (UMAX.TO)

With covered call strategies, the attraction is the tremendous yield for income. Dividends plus covered calls give a yield ~13%. Not just utilities -- also telcos, CP, etc. 

Need to look at total return, as these strategies tend to underperform the underlying securities. Since inception (just under 3 years), total return is 25%. Holding the TSX 60 would put you up 72%.

He doesn't like to use leverage in the ETFs he uses, and he'd have to check whether this one has it or not. He hasn't been super-positive on the utilities space in Canada, but it could potentially be at a bottom. Infrastructure buildout would be positive.

He's looking at the space, but it's definitely way down the list of things to add right now.

No, because you're going to earn the dividend from the underlying securities. Unless every stock in the basket cancels its dividend, which is extremely unlikely. You get the extra yield from the covered call overlay, so volatility would have to be zero for the option overlay to be zero.

While not impossible, it's extremely, extremely unlikely. Don't worry too much about that. The enhanced yield really comes from the price of volatility. As markets go higher and volatility contracts, the yield will compress. Unless the managers write calls closer to the money, so they can keep the yield up -- but that minimizes upside potential of the underlying stocks.

In the US, a portion of the utilities market has actually become a bit more growthy and is acting more like an AI play. 

In Canada, utilities are pretty typical. Payouts are steady and stable. Long-term rates impact utility prices, so if those come down then utilities would benefit. Covered writing doesn't offer huge premiums because the volatility is so low. But that's OK. Though the sector won't shoot the lights out (not really its mandate), still likes it.

You could pair this with a utility ETF that doesn't use covered calls.

Important point that yield does not equal total return. Covered calls work best in sideways to slightly up/slightly down markets. Sacrifices upside. 

But what was the cost of writing those options? Compare it to XUT, which is up 21%. Whereas UMAX is only up 7%. Because of the lower volatility in utilities, you have to write tighter options (closer to where the price is today). This results in foregoing more of the upside.

Not really for growth-focused investors, more for income investors.  One strategy would be to hold some of this, but blend it with an ETF that doesn't write calls.

Advertises a 15-16% yield. You have to ask yourself how come? T-bills are paying only 2-2.5%. Price has dropped appreciably since its IPO 2 years ago, just look at the chart. There are 2 types of ROC:  return ON capital, and return OF capital. So this is giving you back your own money and adding it to the posted yield number. Wouldn't touch it.

A good sector with minimum volatility.

Leverage and covered calls to generate income. The utility trade has already happened with lowering interest rates, so further capital appreciation is limited. Know why you're owning it.

Less risk in ETFs, so you could pick some different sectors for a weighting of 10%.

Hamilton ETFs has a whole series of sector-based, option strategy ETFs for enhanced income. He likes these ETFs, but it you are really bullish on the outlook, you want the underlying holdings and not the extra income necessarily. But if you want income, this is a great way to get it tax-efficiently, though you will give up long-term growth.

Most of the names in UMAX are seeing downward pressure on their share prices mostly due to high debt levels and margin compression from high interest expenses. With a decline in rates, we could see several of the underlying names in UMAX bouncing higher, and we feel that this could bode well for UMAX, however, it is a covered call ETF and so its unit price will not see as large of an increase as the underlying holdings would in the event of a rebound. For an investor seeking high yield and the potential for a recovery in share price, we think this name can do well if rates continue to decline, although, due to its covered call strategy, the unit price can continue to slide from here.
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Key difference is UMAX is focused on blue-chip, Canadian utilities. Reduces volatility by writing an options strategy. If you think we're going to be entering a more tumultuous period, utilities tend to do better.

HMAX is a similar setup, but with underlying financials. 75% exposure to the big 6 banks, which have struggled. Argument that banks' exposure to real estate makes them more economically sensitive. In a good economic environment, banks will do better.

Neither uses leverage. When the yields get juicy, remember that some of that's return of capital. Also remember that covered writing can be a drag if the market is anything but flat, slightly up, or slightly down.