Harvest sees more value in volatility than investors think

This article was produced in partnership with Harvest ETFs

Paul MacDonald of Harvest ETFs does not soften his read on the current market. “Yes, we should be nervous,” he says. The advisor’s job, is to work through uncertain conditions, and “there’s rarely ever any certain environments.” What MacDonald rejects is the idea that nervousness should change the plan.

September “historically is the most volatile month of the year,” and the run toward the U.S. midterm elections adds headline risk. Against that, he sees earnings growth and fundamentals still intact. Inflation is the risk he flags most directly, showing what he calls “some signs of weakness,” though he stops short of saying it is cracking.

MacDonald describes the expected pullback through what he calls his light socket theory. Everyone knows touching a light socket will shock them, and the market is likewise due for a shakeout, “but it still comes as a shock.”

Keep defensive holdings such as utilities and healthcare on the equity side while staying committed to growth, MacDonald advises. He also disputes the view that stocks are stretched: “Contrary to popular belief, valuations are almost bang on in line with the 10-year average. Stay the course, stay optimistic, but don’t be naive to the tail risks here.” Harvest’s new fund, HONE, provides exposure to high-growth stocks via a portfolio of Harvest ETFs, in which the underlying ETFs write options to adds income while maintaining exposure to these growth names.

Investors can maintain exposure to companies with stronger growth characteristics while reconsidering how concentrated that exposure has become, and how much value can be extracted from the volatility surrounding it.

Growth, with another source of return

HONE, was launched on October 1. It brings U.S., Canada and international exposures together in one portfolio. HONE is built from three existing Harvest strategies, each pairing a growth-oriented basket with an option-writing program.

MacDonald describes the underlying universe as roughly 45 to 50 unique stocks once the three geographic sleeves are combined. Each sleeve emphasizes higher-growth, higher-momentum companies, with an options strategy used to generate income.

The income comes from the same place in every sleeve. Higher-growth names tend to be more volatile, and greater volatility produces larger option premiums. MacDonald notes that the sleeves are not independent, acknowledging similarities in style and sector. They behave differently enough to matter, “They’re not all dancing to the same song at the same time.” In HHIS, he says, areas that pulled back were offset by others that held up better, and adding Canada and international exposure extends that effect.

What the fund is, and what it needs around it

“This is not an all-weather market fund,” MacDonald says. “We’re not trying to be everything to everybody with this product.”

That makes portfolio placement more important than the convenience of the one-ticket structure might suggest.

An investor who wants a larger Canadian allocation, less international exposure or a more tailored mix among the three regions may still be better served by holding the underlying strategies separately. HONE is intended for investors who want a single allocation to Harvest’s higher-growth, income-oriented approach across all three markets.

For clients who already own several income ETFs, MacDonald sees two natural starting points. Those holding high-income products tied to growth, or high-growth funds that have performed well, can use HONE as a way to “monetize some of the volatility” and collect cash flow from premiums.

“How should this be allocated? Who should have it?” MacDonald says. “Putting it in with, call it 50 names, gives even advisors comfort when you’re going into those higher-risk areas that you’re getting that diversity.”

Harvest favours a wider set of names rather than concentrating the strategy around whichever companies currently dominate the growth trade.

The most volatile holdings are where that trade-off is sharpest, and SpaceX is the clearest example. Harvest holds it in its SPXE product, and MacDonald says it is “very difficult to value” and “going to be highly volatile.”

Harvest wants exposure to the company because MacDonald sees few competitors able to do what it does in an industry he expects to grow substantially over the next decade. Valuation is much harder for him to pin down.

“We want to be there, but it’s not a name that I have high conviction on valuation,” he says.

That is why SpaceX carries a relatively small allocation. Its volatility can support richer option premiums, but MacDonald does not treat that income as compensation enough to ignore valuation risk.

“We get great premiums,” he says. “We have a relatively small allocation and it’s giving people kind of what they want, which is they really want to have some SpaceX, with what we need, which is some diversity.”

MacDonald says companies with stronger cash flows, longer operating histories and valuations Harvest can underwrite with more confidence receive larger weights. In HHIS, he points to Apple, Nvidia, Alphabet and Eli Lilly as examples.

MacDonald sees the one-ticket structure as useful where the desired exposure is already clear. An advisor who wants higher-growth equities, option income and geographic breadth can get all three without having to choose among the individual Harvest funds each time.

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