Horizons launched a whole slew of covered call ETFs last year of which the Horizons Enhanced Income Equity ETF (HEX) turned out to be the most popular. Enticed by the initial yield of about 20%, investors purchased as much as $247 million worth of HEX last year. The ETF invests in an equally-weighted portfolio of the largest 30 Canadian stocks and aims to generate monthly income by writing out-of-the-money covered calls on its stock holdings.
It appears that many investors had (just like they did with the BMO Covered Call Canadian Banks ETF) hoped that the juicy distributions will translate into higher total returns compared to a plain vanilla product like the iShares S&P/TSX 60 Index ETF (XIU). Now that HEX has a 1 year track record, let’s compare its performance with that of XIU:
Total Returns for the 1-year period ending March 31, 2012
Horizons Enhanced Income Equity ETF (HEX): -11.50%
iShares S&P/TSX 60 Index ETF (XIU): -10.32%
Now, let’s compare the income generated by the two ETFs as a percentage of starting NAV:
Income generated for the 1-year period ending March 31, 2012
Horizons Enhanced Income Equity ETF (HEX): 13.34%
iShares S&P/TSX 60 Index ETF (XIU): 2.25%
and the change in price level (assuming distributions are not reinvested):
Horizons Enhanced Income Equity ETF (HEX): -24.55%
iShares S&P/TSX 60 Index ETF (XIU): -12.62%
It is too early to draw definitive conclusions but it is interesting to note that HEX has slightly underperformed XIU on a pre-tax basis over the past year. However we can draw one conclusion: it is important to look beyond just the current distributions in evaluating an investment. A product with higher current income may not necessarily be the one that turns out to have higher total returns.
