Ben Felix - High Income Investments: A Warning

Short Summary

Main recommendation: Do not judge an investment by its distribution yield, because yield is not the same as expected or realized total return. High-yield products such as covered call ETFs and structured products are heavily marketed on yield, yet many have delivered lower total returns than their underlying holdings, with added costs and tax drag.

Key Points

• Products are marketed on headline yields (the OSC noted funds advertised with yields as high as 15%, especially covered call ETFs), and investors often assume yield equals expected return, which it does not.
• Covered call funds generate most of their yield from option premiums, but by writing call options they give up upside when the underlying stock rises above a set price, lowering expected return versus the underlying stock.
• Realized results support the warning: HMAX (Hamilton Canadian Financials Yield Maximizer ETF), which targets a 13% yield, had a total return of negative 4.69% since its January 2023 inception, underperforming Canadian financials.
• Structured products are sold largely on high "headline" rates that represent best-case scenarios, and banks target less sophisticated households with them, leading to high costs and low expected returns.
• Some regular equity mutual funds buy stocks just before dividend payments to inflate their yield, which attracts inflows but adds turnover and taxes estimated at 0.57% to 1.52% per year in added costs.

Details Worth Noting

• Concrete instructions: look at total return rather than distribution rate, and compare it against the underlying holdings, as in the HMAX, YieldMax Tesla, and BMO Covered Call Canadian Banks examples he cites.
• Ben Felix gives examples: YieldMax Tesla Option Income Strategy ETF, with a 60% distribution rate, had a total return dramatically below the underlying Tesla stock since inception.
• The BMO Covered Call Canadian Banks ETF's 10-year return trailed its underlying holdings despite a much higher distribution yield.
• The Ontario Securities Commission published an issue-oriented review noting the marketing of high-yield funds; the concern is emphasis, not that the yield figures are factually inaccurate.
• Total returns matter even for investors who need income from their portfolio, since income can be generated from total return rather than yield alone.

Bottom Line

A high distribution yield tells you how much cash a product pays out, not whether you will end up with more money; judge it by total return, costs, and taxes.