Maximizing a Sector That Investors Rely on for Defensiveness and Cashflow
We might be obsessed with shiny new objects, but there’s something to be said for reliability. You can rely on the Crème Brulé on a dessert menu to be delicious. You can rely on Bruce Springsteen to give an excellent concert.
Investors have relied on utilities to provide defensiveness and income.
Utilities stocks might not have the same obvious appeal as a Springsteen show or a sweet custard-based dessert, but the sector shares their reliability. When investors want to own stocks that provide downside protection and can generate dividend yields, they invest in utilities. It’s a strategy that investors have relied on for decades and after a volatile start to 2022 on the markets, investors of all risk tolerances should be considering utilities.
The logic behind utilities investing is a simple one. Companies that provide electricity, gas, and telecommunications enjoy a nearly constant level of demand, because we all need the services they provide. They typically have huge scale, allowing them to weather storms. They also have monopolistic tendencies in industries with high barriers to entry, meaning they are resistant to disruption. They are reliable.
That reliability underpins the investment approach in the Harvest Equal Weight Global Utilities Income ETF (HUTL:TSX). But where traditional Canadian investors might just buy some Enbridge stock and call it a day, HUTL includes a few strategies designed to maximize the defensive benefits and income potential that utilities can provide.
That begins with diversification. The way to make an already defensive asset even more defensive, is to diversify it. HUTL owns utilities stocks spread across subsectors like telecoms, pipelines, electricity, and natural gas, so that a temporary issue in any one subsector doesn’t derail the whole portfolio.
Added on to that, HUTL holds stocks spread all over the world, with a roughly 40-20-40 split between the United States, Canada, and Europe. Natural disasters are one risk that can severely damage a utility provider. By spreading out their holdings, the portfolio management team at Harvest ETFs is able to amp up the defensiveness of their utilities ETF.
With the defensiveness box ticked, the Harvest ETFs team has worked to maximize the income paid to unitholders by HUTL. Many utilities companies already pay an attractive dividend, but Harvest has an extra tool in their kit: the covered call.
Covered calls are an investment strategy whereby a portfolio manager sells ‘call options’ on their holdings, meaning buyers will pay that portfolio manager a premium to buy some of that stock at today’s price at a later date. In a Harvest Equity Income ETF like HUTL, those premiums are paid out to unitholders as tax-efficient income. As of January 31st 2022, HUTL paid out an income yield of 7.09%.
Selling call options has a few other implications for a portfolio, it offsets some of the potential growth an ETF could experience, but it also offsets some potential volatility or downside. Harvest ETFs is the third-largest call option writer in Canada, and their team brings considerable sophistication and expertise to the use of this strategy in HUTL. Overlayed on an already defensive asset like utilities, and the call option helps turn the sector’s benefits up to 11.
For an investor seeking a defensive position and high income yield, utilities are the classic choice. Even in a world with seemingly countless investment options, the appeal of that classic holds true. With HUTL, Harvest ETFs have simply amped up that classic appeal, maximizing defensiveness and maximizing yield from a sector that investors rely on for both.
Talk to your financial advisor for more information and visit Harvest at
Web URL: https://harvestportfolios.com
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