Designed to generate high yields from call option premiums, providing monthly income distributions, the ETFs are suitable for holding over longer periods
Each NEO Exchange-listed ETF offers exposure to the underlying stock while applying 25 per cent leverage to the position, a covered-call overlay on 50 per cent of assets, and a currency hedge to Canadian dollars.Altogether, these characteristics make the funds unique to North American markets, says Nicholas Mersch, portfolio manager with Purpose Investments.
At the same time, the “modest leverage” makes up for a portion of lost upside if the underlying stock’s price rises significantly, resulting in 50 per cent of the stock “being called away,” he adds. In this respect, these single-stock ETFs may differ from Canadian depository receipts that CIBC Capital Markets launched in 2021, providing direct exposure to several popular U.S. names including Walt Disney Canadian Depositary ReceiptsCDRs, Mr. Mersch explains, can require U.S. tax filing when invested assets exceed certain thresholds, whereas ETFs do not.
“Think of it as collecting rent while housing your favourite U.S. securities,” he says about the distribution yields ranging from about 15 per cent for Tesla Yield Shares Purpose ETF and 6 per cent for Berkshire Hathaway Yield Shares Purpose ETF.Darren Coleman, senior portfolio manager, private client group with Coleman Wealth at Raymond James Ltd. in Toronto, is among the advisors interested in these ETFs.
Whether the electric vehicle automaker’s stock recovers to its past peak or not, “the stock will likely remain volatile because investors trade it like crazy, and so, I can turn that into an income opportunity for clients,” he says.
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