Harvest ETFs built its latest ETF to give investors access to international companies and the liquidity needed to support a covered call strategy
Bull markets have a habit of rewriting investment convictions. As U.S. equities continued to outperform, many investors found fewer reasons to look overseas. International diversification remained a principle of portfolio construction, but increasingly not a priority.
The S&P 500 repeatedly outpaced most international benchmarks, fuelled first by mega-cap technology and more recently by artificial intelligence. The Canadian ETF shelf offered plenty of covered call income, but nearly all of it pointed at North American names, where deep options markets make income generation relatively straightforward. Global equity funds have traditionally been built to provide geographic diversification.
Harvest ETFs believes that gap has become an opportunity. The Harvest International High Income Shares ETF began trading on the Toronto Stock Exchange on July 23 under the ticker HHII, extending a covered call income suite.
“We saw such incredible demand for both our U.S. and Canadian High Income Shares ETFs,” said James Learmonth, Co-CIO at Harvest ETFs. “It became clear there was need for products that combined growth and high income, but there wasn’t really an international mandate that addressed both.”
The constraint was structural
Generating option income outside North America is considerably more complicated than buying overseas equities. Options markets exist across Europe and Asia, but they operate differently, particularly when it comes to collateral requirements, and liquidity can be far less consistent than managers accustomed to U.S. markets might expect. For a strategy designed to write covered calls month after month, such differences matter.
The workaround is to reach international companies through U.S. listed securities, such as American depositary receipts, which trade in the United States alongside a deep options market. That is the structure underneath HHII.
“We get kind of that dual benefit of the international company investment access, but at the same time, we’ve also got access to a very liquid options market in the United States,” Learmonth said.
Demand was already visible from the two earlier funds, which he described as leaving a gap where international mandates satisfying both requirements should have been.
International still speaks the language of AI
International investing is often framed as an alternative to the U.S. technology trade. The portfolio suggests the distinction isn’t nearly so clean.
The ADR structure naturally narrows the investment universe to companies with the size, liquidity and options markets needed to support a covered call strategy. Harvest also limits itself to businesses headquartered or incorporated outside Canada and the United States with market capitalizations above $10 billion. This has resulted in a concentrated collection of large multinational companies.
Semiconductors carry the most weight. Taiwan Semiconductor, ASML, SK Hynix, STMicroelectronics and Arm Holdings account for roughly one-third of the portfolio, a reminder that artificial intelligence may have captivated Wall Street, but many of the businesses supplying the industry’s critical infrastructure sit well beyond U.S. borders. That doesn’t mean the portfolio is simply a collection of semiconductor names. Energy, financials, healthcare and industrials all feature prominently.
Perhaps the most unexpected holding is Embraer. Although the Brazilian aircraft manufacturer is domiciled in what many investors still classify as an emerging market, its competitive set is unmistakably global. The company competes alongside Boeing, Airbus and Bombardier.
“We’re not really approaching it from an exclusionary perspective,” Learmonth said. “We’re just trying to find the best opportunities.”
Every source of income has a price
The appeal of generating higher cash flow is straightforward. The mechanics are less so. Building an international covered call portfolio means making deliberate decisions about leverage, currency exposure and risk.
Harvest’s fund employs modest leverage, creating total exposure of approximately 25% above its net assets. The additional borrowing increases exposure to underlying holdings and is intended to increase the option premium available for distribution while seeking capture more of the upside.
“Leverage does work both ways. So, if markets decline, you’re also levered on the downside as well,” Learmonth said, describing 25% as moderate, material enough to matter to the distribution without being overly aggressive.
Currency introduces another layer. The fund is unhedged, meaning investors are exposed not only to movements in the underlying companies but also to exchange-rate fluctuations. Because the portfolio holds some ADRs, changes between local currencies and the U.S. dollar affect the receipts first, before movements between the U.S. and Canadian dollars are reflected in the fund’s returns.
Higher volatility generally produces richer option premiums, increasing the cash flow available from covered call writing.
For years, international allocations often meant accepting lower income in exchange for broader diversification. Products like this suggest that equation is becoming less fixed, giving advisors another way to think about the role overseas equities can play in client portfolios.
Disclaimer
The content of this article should not be considered as advice and/or a recommendation to purchase or sell the mentioned securities or use to engage in personal investment strategies. Tax, investment and all other decisions should be made with guidance from a qualified professional.
Commissions, management fees and expenses all may be associated with investing in Harvest Exchange Traded Funds managed by Harvest Portfolios Group Inc. (the “Funds”). Please read the relevant prospectus before investing. The Funds are not guaranteed, their values change frequently, and past performance may not be repeated. Distributions are paid to you in cash unless you request, pursuant to your participation in a distribution reinvestment plan, that they be reinvested into available Class units of the Fund you own. If a Fund earns less than the amounts distributed, the difference is a return of capital.
This article was produced in partnership with Harvest ETFs
