'A core equity solution for investors': how Harvest assembled brand giants for one surefire ETF

Wealth Professional spoke to Harvest Portfolios' James Learmonth about a uniquely big-brand ETF

'A core equity solution for investors': how Harvest assembled brand giants for one surefire ETF

This article was produced in partnership with Harvest Portfolios.

The companies listed in Harvest Portfolio’s Harvest Brand Leaders Plus Income ETF (HBF:TSX) aren’t just household names – they’re virtually part of the furniture.

Take a look around right now and chances are you’ll have one of their products nearby: tech from Apple or Microsoft, consumables from Pepsi or McDonalds, domestic staples from Johnson & Johnson and Proctor & Gamble.

It is, as James Learmonth (Senior Portfolio Manager, Harvest Portfolios Group) says, “a highly reliable portfolio”.

“You can feel comfortable owning this,” he reflects. “These are great companies. They've been around for a long time and they're dominating players in their markets.”

“You want to be invested in companies that are proven to be great operators, have strong management teams, and have growing markets over time. HBF is really a core equity solution for investors.”

Launched in 2014, the ETF is an equally weighted portfolio of 20 large companies selected from the world’s Top 100 Brands. Designed to provide a consistent monthly income stream with an opportunity for growth, it generates an enhanced monthly distribution yield by engaging an active covered call strategy.

“Part of our strategy,” Learmonth elaborates, “is that, every month, we calculate what we call a hurdle rate. We calculate how much option premium we need to generate in order to meet our monthly distribution requirements net of fees, and natural dividends that we get from underlying holdings.”

It’s precisely this strategy that guided the ETF through the darkest days of the COVID pandemic – a famously uncertain time, even for a fund comprised of such massive names.

“When the pandemic started in February 2020,” Learmonth recalls, “we felt that this was a period where markets were really going to start to sell off, as they started to realize the ramifications of what was happening.”

“We decided it was a good time to get out and be very aggressive in our write level – so we were writing at our maximum levels across our ETFs, generating excess option premiums for that period.”

By April 2020, the massive brands in this ETF began to lead the global recovery. Learmonth and his team saw indications that the markets were at “historically oversold levels” and ready to bounce back.

“We looked at that extreme environment and decided to write less than we needed to,” Learmonth explains. “By doing that, we were able to capture significant amount of upside compared to what we would have been able to capture had we used a passive call strategy, while meeting our distribution requirements in aggregate.”

And while such market unpredictability is still being keenly felt – “we'll probably see more muted gains, compared to 2022, with a higher level of volatility … I think you'll see the market kind of seesaw over the course of the year” – Learmonth is confident that, in terms of the impact of COVID, “the worst of the economic damage is behind us.”

That confidence was reflected in last September’s increase to the Harvest Brand Leaders Plus Income ETF’s monthly distribution, from $0.0542 CAD per unit to $0.0600 CAD per unit. “We were able to increase the distribution given some of the market appreciation that we had seen over recent years,” Learmonth said. It seems that HBF will continue to be a beacon of relative stability no matter what transpires.

“We have the ability to adjust our write levels based on market conditions,” Learmonth summarizes. “We can react if markets get particularly oversold, or if specific companies get particularly oversold or overbought. We're able to adjust our write levels and take advantage of those extreme moves while continuing to generate income for clients over time.”

James Learmonth is the Senior Portfolio Manager for Harvest Portfolios Group.

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