Ultra High Yield with Capital Appreciation

Isn’t this close to the ultimate investment? Ultra high yield with low risk of capital decline or capital keeping up with inflation over the medium to longer term? I would say that it could be ideal for quite a number of investors.

I always thought that the top Canadian banks are quality investments with a history of growing dividends and capital appreciation at a respectable rate. I would probably single out Royal Bank of Canada (RY) as top pick based on a quick assessment, but I am extremely selective when investing in single company stocks. I am also careful of funds with lengthy lists of constituents including average to mediocre investments. Recently I have been researching available funds focusing on top Canadian financial companies. I stumbled upon a brand new ETF with ultra high yield based on the top Canadian financial companies: Hamilton Canadian Financials Yield Maximizer (HMAX) launched on January 20th 2023 on the Toronto stock exchange. Please note that this article is focusing in on details of HMAX ETF and fund information related and performance statistics as oppose to addressing the context and macro economy.


The fund consists of only the top 10 Canadian financials with weights seemingly based on market capitalization, which I prefer to equal weighting. I also like the low number keeping the fund very focused. Weights as per the fund manager’s website: HMAX – Hamilton ETFs

Could you replicate the fund? If you can beat the fund manager’s performance on covered call writing I guess, but for most investors it would not be a consideration. More about the fund manager later.

Dividend Histories

All constituents have healthy dividend growth trends over the long term. Only BN and CM are having a negative dividend CAGR over the last 5 years. CM however does have a positive CAGR in USD terms though.

**Total Return Histories **

The current slide in banking stocks due to turmoil triggered by SVB Bank on top of a general decline has also put pressure on Canadian financials resulting in lower valuations. Considering this, the all green total return figures for 3 years and up for all constituents are providing additional confidence in the longer term performance. Currency fluctuations are creating volatility in USD terms though.

The CAD have traded in a channel against the USD over the past 5 years and deteriorated by 4.59% over this period. It is a two-edged sword I believe with risks both ways going forward:

Yield Boost via at- the-market Covered Calls

As mentioned, the fund manager is using a covered call strategy to boost the yield in addition to the normal dividends to reach the ultra high yield on current cost of around 15%. The fund manager are specifically using at- the-market covered calls for this fund to maximize options income. A 50% level of covered calls are being utilized currently. No leverage is used for HMAX. There is not much of a history to go by, but other funds from the same manager seem to heave consistent monthly distributions. In general the level of covered call income is related to the level of volatility, so this component of the income could come down as volatility settles down. High levels of general volatility in the markets might be with us for some time to come though.

Fund Manager

The fund manager – Hamilton ETFs is a Toronto based company established in 2009 and seem to specialize in enhanced income. The overall impression is positive. Their ETF offerings include 11 funds with some utilizing covered calls and others with either zero or 25% leverage. All funds are running monthly distributions irrespective of underlying dividend distribution schedules and are all paying consistent or growing distributions. Funds are audited by KPMG but are relatively young though. Management fees varies between 0.45% and 0.75% with HMAX at 0.65% which is within reason for a covered call fund. All funds are very focused with a small number of constituents, which are either single companies or listed funds. The management team seems to be experienced and details of individuals are disclosed on their website. Further due diligence is always a good idea.

Manageable Risks

Speculators or investors looking for maximum capital gain might not achieve their goal. Covered call strategies are generally reducing capital gains while downside is not always reduced at a similar level. This is a new fund so the effectiveness of the at-the-market covered call strategy remains to be seen. The underlying assets do form a good base with a decent dividend % and growth to support steady growth.

At this stage the fund is only available in CAD denomination. USD based investors need to manage the currency volatility which is a two edged sword. The USD strengthening cycle seem to have stabilized. In the long run the CAD could be trading in a sideways channel and even provide forex opportunities. From a brokerage perspective, it should also be fairly simple to put in trades. I use IBKR USD based brokerage account and there is no need for currency exchange as my account is automatically debited in CAD at the spot rate at the moment a trade is executed. Assets are listed as $163.5 million CAD on their website, but trades went through relatively easy with reasonable spread considering a longer term investment approach.

Canadian housing is generally more expensive than in the United States. This could pose a mortgage default risk for Canadian banks. Higher rates could translate into fewer mortgages being originated. However, Canada does have very stringent banking regulations. The government makes the banking industry difficult to enter as it requires an 11% CET1 ratio, and there is a requirement to report on liquidity coverage ratio. These regulations make the probability of a Canadian banking crisis highly unlikely as Canada’s banks have not faced a serious crisis for over a century.

The impact of technological advances in general including blockchain and 4IR could pose a medium to longer term threat to conservatively managed Canadian financials.


HMAX ETF seems to be a very interesting offering leveraging the very respectable, consistent performance and safety of the top Canadian financials. These financials sport good capital gains, high dividend % to cost and dividend growth with a long track record and guarded (to some extend as least) by stringent and conservative government requirements. Against the backdrop of the current banking situation, the new HMAX is creating a very favorable opportunity for investors interested in top Canadian financials with substantially enhanced yield with the capital likely to at least keep up with inflation in the longer term. Investors not interested in ultra-high yield could opt for selecting their own portfolio of Canadian financials (with the option of USD denomination for the bigger ones) with smaller distributions albeit with a possibly higher growth rate. Please share your thoughts and your top high yield or dividend growth ideas.