Harvest ETFs' strategic shift: Venturing into fixed income with innovative ETFs

Mike Dragosits details Harvest Portfolios Group's expansion into fixed income

Harvest ETFs' strategic shift: Venturing into fixed income with innovative ETFs

This article was produced in partnership with Harvest ETFs

Historically focused on equity income and covered calls, Harvest ETFs recently ventured into the fixed income space, a strategic shift marked by the launch of their first product, the Harvest Premium Yield Treasury ETF (HPYT). This ETF, unique in Canada, mirrors strategies seen in the US market, offering covered calls on long-term treasuries. “It's about bringing a successful U.S. strategy to Canadian investors,” Mike Dragosits explained.

Dragosits, Portfolio Manager at Harvest ETFs was previously associated with a major bank. He was drawn to Harvest ETFs by the opportunity to be part of an expanding company. “When I joined, Harvest was managing around $600 to $700 million, and now it's grown to $3.7 billion,” he noted, highlighting the firm's impressive growth trajectory and its diversification into multiple products.

Embracing fixed income

"We've recently expanded into the fixed income market at Harvest, venturing beyond our traditional focus on equity income and covered calls. Late last year, we entered this new territory with the launch of the Harvest Premium Yield Treasury ETF (HPYT), focusing on long-term bonds. This move was a pioneering step in Canada, mirroring similar strategies already available in the U.S. for several years,” Dragosits says.

“Additionally, we're introducing new products, including the Harvest Premium Yield 7 to 10 Year Treasury ETF, which employs the same covered call strategy targeted at the 7-to-10 year maturity range – a first in Canada. We're also launching a short-term option, the Harvest Canadian T-Bill ETF, offering an attractive yield option for Canadians in the current market.”

The core of Harvest's approach lies in its covered call strategy, especially relevant in the current high-yield environment. Dragosits discussed how this strategy provides attractive monthly cash flows, essential for investors seeking steady income. “By writing call options, we boost the monthly income for investors, making it a compelling choice for those looking for high, steady monthly cash flow,” he stated.

Addressing market volatility and interest rate fluctuations

Dragosits acknowledged the challenges and opportunities presented by the current economic environment, particularly the aggressive interest rate hikes. He emphasized that while Harvest doesn't make active decisions based on interest rate predictions, their covered call strategy is dynamically managed to adapt to market changes. “We can adjust our strategy based on market conditions, ensuring consistency in our monthly income distributions,” he explained.

He goes on to say, “With the recent aggressive interest rate hikes leading to rapidly rising yields, it's been a difficult time for bond investors. However, looking ahead, we believe we might be at or near peak yields. Whether yields remain high or decrease, it seems like an opportune moment to consider fixed income investments. In this context, covered calls could be particularly advantageous, especially for those seeking higher monthly cash flows than what the underlying bonds alone would generate.”

Dragosits maintained, in the context of fixed income, the focus is primarily on the interest rate and yield market. The covered call strategy may underperform relative to total performance. This underperformance stems from the limitation imposed at the strike level on a portion of the fund. Consequently, in dramatic market shifts, there is a potential sacrifice of some upside gains.

However, as Dragosits reassures, this does not translate into a total loss. Absolute gains are still achievable through rising bond prices, coupled with the capture of cash flow from the sale of call options. In scenarios where yields remain high, the performance is likely to be robust. This is attributed to the combination of high yield and the collection of elevated monthly premiums from the sale of call options.

“Our approach involves rewriting options each month, consistently collecting premiums, which can lead to relative outperformance of the covered call strategy compared to bonds alone,” Dragosits says.

Diversification and choice

Regarding the Harvest T-Bill ETF, designated TBIL on the TSX, it represents a distinct approach compared to other offerings. This fund is straightforward and ‘plain vanilla,’ exclusively focusing on Canadian government Treasury bills (“T-Bills”) with maturities ranging from zero to three months. Notably, this fund does not involve covered calls.

The key function of the TBIL is to manage a portfolio of these short-term T-bills, distributing variable monthly payments to investors. These payments are based on the income generated from the underlying T-bills. The fund offers investors a cash alternative, featuring a very competitive rate thanks to the current yield environment. With yields around 5% for Canadian T-bills, it presents an attractive option.

Dragosits says, “TBIL is especially designed for those seeking a low-risk investment fully backed by the Canadian government. It's an ideal choice for investors looking for a cash alternative in the current financial landscape.”

To learn more about Harvest Fixed Income ETFs, please click here.


Mike Dragosits, CFA | Portfolio Manager

Mike joined Harvest ETFs in March of 2017 bringing over 8 years of broad investment industry experience to the firm. Immediately prior to joining Harvest ETFs, he was a Senior Commodity Strategist and part of the Global Macro Strategy team at a major Canadian investment bank, where he conducted in-depth fundamental and technical research and prepared detailed investment recommendations for internal and external clients globally."