It’s true that, as a bunch, utility shares are thought-about defensive. Their revenues are sometimes supported by regulated price frameworks, capped returns, and important demand. Individuals nonetheless want electrical energy, pure fuel, and water whether or not the economic system is booming or in recession.
However there’s nonetheless significant variation inside the sector. Not way back, a well known Canadian renewable utility shocked buyers by slashing its dividend, sending the inventory sharply decrease in a single day. Whenever you personal a person title, that sort of occasion can do actual injury to your portfolio.
One solution to cut back that company-specific danger is to personal a basket of utilities as a substitute of betting on only one. You could quit some upside in a powerful rally, however you considerably decrease the chances of struggling a dramatic wealth haircut from a single dividend reduce or regulatory challenge.
Utility investing additionally doesn’t should imply settling for modest yields. Some exchange-traded funds (ETFs) layer in structural enhancements resembling lined calls or modest leverage to spice up revenue. That added yield comes with larger charges and higher volatility, so it’s essential to grasp the trade-offs earlier than investing.
With that in thoughts, listed here are two Canadian utility-focused ETFs from Hamilton ETFs that stand out for buyers searching for regular revenue with a defensive tilt.
Leveraged utilities
My first decide is Hamilton Enhanced Utilities ETF (TSX:HUTS). It tracks the Solactive Canadian Utility Excessive Dividend Index, a rules-based benchmark of equally weighted Canadian utility shares.
One factor value highlighting is that the definition of “utilities” right here is broader than simply conventional energy, fuel, and electrical energy suppliers. Sure, these regulated rate-base corporations are included. However HUTS additionally contains telecommunications corporations and pipeline operators.
Whereas telecoms and pipelines don’t function underneath the very same regulatory frameworks as electrical utilities, they supply important companies. Canadians nonetheless want wi-fi service, web entry, and power transportation whatever the financial cycle. Because of this, these companies usually share comparable traits: regular money circulation, excessive capital depth, and recurring income.
What makes HUTS distinctive is its use of 1.25 occasions leverage. In easy phrases, for each $100 of investor capital, the fund borrows a further $25 and invests $125 into the portfolio. That amplifies each potential returns and potential losses. In sturdy or secure markets, leverage can enhance complete return and revenue. In downturns, it might probably enlarge drawdowns.
Proper now, HUTS pays a 6.17% distribution yield with month-to-month payouts. That’s meaningfully larger than most plain-vanilla utility ETFs, however you’re taking on further danger to earn it.
Lined Name Utilities
If leverage makes you uncomfortable, that’s fully affordable. There’s one other solution to improve yield from utilities with out meaningfully rising volatility, though it does cap upside. That method is utilized in Hamilton Utilities YIELD MAXIMIZER ETF (TSX: MAX).
UMAX additionally holds a portfolio of Canadian utility-related shares. Like HUTS, it expands past simply electrical and water utilities to incorporate telecommunications names. As well as, it might probably embrace waste administration companies and even Canadian railroads, which share infrastructure-like traits and secure demand profiles.
As a substitute of borrowing cash, UMAX makes use of a lined name technique on roughly 50% of the portfolio. Particularly, it sells at-the-money name choices on half of its holdings. A lined name means the fund owns the inventory and sells another person the precise to purchase it at a set value. If the inventory rises above that value, the upside on that portion is capped. In alternate, the fund collects possibility premiums upfront, that are distributed to buyers as revenue.
The trade-off is evident. You quit a part of the upside potential on half the portfolio, however you obtain a a lot larger and extra constant money circulation stream. That’s the reason UMAX’s yield is at the moment even larger than HUTS at 14.26%.
Simply keep in mind: with that stage of yield, you shouldn’t count on a lot value appreciation over time. Most of your return is more likely to come within the type of month-to-month distributions, not capital positive factors.