Single-stock ETFs that use covered calls and leverage may soon be coming to Canada.
Toronto-based Purpose Investments Inc. filed a preliminary prospectus for the Purpose Yield Shares ETFs, 10 yield-focused single-stock ETFs that would be the first of their kind in Canada. The liquid alternative products would be available for 10 large U.S.-based companies: Apple, Amazon, Tesla, Berkshire Hathaway, Alphabet, Microsoft, Exxon Mobil, JPMorgan Chase, Johnson & Johnson and UnitedHealth Group.
Each ETF would provide exposure to one underlying issuer while using leverage of up to 25% and covered calls to provide income through monthly cash distributions. The ETFs would also hedge U.S. currency exposure back to the Canadian dollar.
Single-stock ETFs arrived on the U.S. market in the summer, offering retail investors access to short-selling and leverage. Most of the products provided daily levered or inverse returns, which prompted warnings from the Securities and Exchange Commission about the risks to investors.
The Purpose ETFs are “extremely different” from those U.S. products, said Vlad Tasevski, chief operating officer and head of product with Purpose.
Because the proposed ETFs limit leverage — which is used for income rather than to provide returns — to 25% and use covered calls to reduce volatility, this makes them suitable for longer-term investors who buy and hold, Tasevski said. He described many of the U.S. single-stock ETFs as “pure trading products.”
The ETFs can be a less volatile complement to holding a stock, such as Tesla, he said, as they’re designed to capture most of the upside while also providing income. The products work best when the underlying stock’s performance is expected to be flat, as the investor won’t miss out on large gains.
“In those cases, this strategy makes a lot more sense and should be a higher allocation versus a single stock,” Tasevski said.
The ETFs’ proposed management fees are 0.4%, and the risk ratings are medium or medium-high. If approved, they would be traded on the NEO Exchange.