How this multi-asset ETF bolsters income

A first in Canada, Brompton's enhanced multi-asset income ETF is a diversified 'barbell' portfolio built to do the heavy lifting within today's uncertain markets

How this multi-asset ETF bolsters income

It’s been a year of pervasive market volatility brewing in a vat of unprecedented upheaval. With soaring inflation, climbing interest rates, supply chain disruptions, international conflict, and now a looming recession, unpredictability has become the new predictability. But for those who can look past the mayhem to see a sprinkling of familiar patterns, today’s markets present ample opportunity.

Investors with a medium risk tolerance looking for higher monthly distributions that won’t cost a fortune in fees can now look to BMAX, a packaged ETF built to perform during uncertain market conditions. Listed on the TSX on Oct. 20, 2022, BMAX is the first all-in-one enhanced multi-asset income ETF opportunity in Canada.

“BMAX is the first Enhanced ETF to include fixed income in its portfolio,” says Chris Cullen, senior vice president and head of ETFs, Brompton Funds. “This is a solution-driven ETF. It holds a basket of Brompton ETFs that were designed to address specific investor issues.”

Unlike many ETF-of-ETF competitors, BMAX charges a zero per cent additional management fee, meaning management fees are charged by the portfolio ETFs only. This, along with asset class, sector, and geographic diversification and a targeted 10 per cent monthly distribution are what distinguish BMAX from other Canadian enhanced ETFs.

Serving the needs of the market

Real Assets historically outperform during inflationary periods. Financials tend to benefit from rising interest rates. A Low Volatility strategy helps to address market volatility concerns. BMAX provides exposure to all these solutions through investments in Brompton Sustainable Real Assets Dividend ETF (BREA), Brompton North American Financials Dividend ETF (BFIN), and Brompton North American Low Volatility Dividend ETF (BLOV). BMAX holdings also include solutions for slowing earnings growth and investor concerns about high equity valuations. 

“The focus of our ETF suite is to provide attractive distributions and the opportunity for capital gains to retail investors.” says Cullen.

The ETF portfolio produces distributions boosted by a moderate amount of leverage. “The initial distribution rate was set at 10 per cent per annum of BMAX’s listing price, paid monthly,” Cullen explains. “BMAX’s 10 per cent distribution rate compares favourably to both Canadian and Global Balanced funds in Canada, which currently offer 3-4 per cent distribution rates, and also Canadian Dividend and Income funds which average 2-3 per cent.”

A preferable split

BMAX focuses on fixed income asset classes that are different than mainstream selections to provide income and diversification. This includes a U.S. Preferred Share ETF (BPRF), and an allocation to Brompton Split Corp. Preferreds.

“You can think of these types of Preferreds as ‘fixed income diversifiers’,” says Cullen. “These are fixed income assets that are outside of the mainstream for Canadian fixed income investors and which compliment and provide diversification benefits to other fixed income or equity positions. These two alternative classes of Preferreds provide income, added stability, and a much more reliable returns profile than Canadian Corporate Preferreds have produced over the past decade.”

A portfolio with muscle

2016 saw an historic 20 per cent increase in the number of people over age 65 compared to 2011. By 2030, Canadians aged 65 and older will surpass 9.5 million, or 23 per cent of the population. With the rising cost of living due to outsized inflation in 2022, generating high levels of investment income is expected to be one of the primary challenges for investors entering their retirement years. BMAX’s high levels of distributions can help investors to meet this challenge.

Brompton’s PM team have positive views on the sectors, geographies and themes comprising the BMAX portfolio, which includes healthcare equities (ETF ticker HIG), technology equities (TLF), and European dividend growth equities (EDGF).

Covered call strategy for distributions and to help keep volatility in check

Brompton’s covered-call program is actively managed.  Their portfolio managers use their own discretion with respect to the amount of calls written on ETF holdings and the level of strike prices, all based on their view of the attractiveness of option premiums.  “This makes the Brompton covered-call program an important active portfolio management tool,” says Cullen.

Brompton’s portfolio management team conducts fundamental research to build high-conviction portfolios, typically 20-40 large-cap, liquid global holdings. 

“Our in-house PMs select a range of attractively valued stocks to create a diversified “barbell” portfolio comprised of both value and growth equities, and they apply their actively managed covered call approach with the goal of increasing total returns for the portfolio,” says Cullen. “Our U.S. Preferred ETF (ticker BPRF) is sub-advised by Flaherty & Crumrine (“FCI”), a firm in Pasadena with almost 40 years of experience solely focused on U.S. Preferreds,” he says.

As of Nov. 3rd, BMAX’s closing price was $12.28 with a distribution rate of 9.8 per cent. Founded in 2000, Brompton is an experienced investment fund manager with income-focused investment solutions including TSX traded closed-end funds and exchange-traded funds.