Costco Yield Shares ETF (YCST): A High-Yield Option for Canadian Investors Seeking Monthly Income

In a world of rising interest rates and volatile markets, investors are increasingly turning to income-generating assets. The Costco Yield Shares Purpose ETF (YCST) offers a unique strategy to capitalize on the long-term growth of Costco Wholesale Corporation (COST) while providing monthly distributions that outpace traditional dividend ETFs. Here's why this CAD-denominated fund could be a compelling addition to income-focused portfolios.

The Covered Call Mechanism: How YCST Boosts Income

The YCST ETF combines direct ownership of Costco's stock with a covered call strategy. Here's how it works:
1. Core Investment: The fund buys Costco shares, giving investors exposure to the company's growth.
2. Covered Calls: YCST sells call options against its Costco holdings. This obligates the fund to sell the shares at a predetermined price (the "strike price") if the option is exercised. In return, YCST collects premiums from buyers of these options.
3. Leverage: The fund uses borrowed cash to amplify its equity exposure, further boosting potential returns—and risks.

The result? Monthly distributions of CAD $0.1200 per share as of June 2025, which are 20% higher than the initial March 2025 payout of CAD $0.1000. These distributions are designated as “eligible” Canadian dividends, offering favorable tax treatment for Canadian residents under the Income Tax Act.

Why YCST Outperforms Direct Costco Ownership

Holding Costco stock directly provides capital appreciation and a modest dividend yield (~0.5% as of 2025). However, YCST enhances this by:
- Generating Premium Income: The covered call premiums add a steady cash flow stream.
- Cushioning Downside Risk: The premiums act as a buffer if Costco's stock price declines.
- Leverage Amplification: Borrowed funds boost exposure beyond 100%, though this comes with added volatility.

Contrasting with Traditional Dividend ETFs

Most dividend ETFs focus on broad baskets of stocks with steady payouts. YCST stands apart because:
1. Targeted Exposure: It concentrates on a single high-quality company with a strong balance sheet.
2. Active Income Strategy: The covered call and leverage tactics are actively managed, unlike passive dividend ETFs.
3. Tax Efficiency: The eligible dividend designation in Canada reduces withholding taxes for local investors.

CAD-Denominated Structure: A Canadian Investor's Advantage

The CAD-denominated nature of YCST eliminates currency conversion risks for Canadian investors. While some ETFs offer USD units (e.g., BTCY.U), YCST's primary ticker (YCST) is tailored to those who prefer to avoid forex fluctuations. This makes it ideal for Canadians seeking to park cash in a stable, high-yield vehicle without international exposure complications.

Risks to Consider

• Leverage Amplifies Losses: Borrowed funds mean declines in Costco's stock hit harder.
• Capped Upside: If Costco's stock surges past the strike price of the written calls, the fund misses out on gains beyond that threshold.
• Distribution Volatility: The CAD $0.1200 payout is not guaranteed; it could fluctuate with market conditions and the fund's performance.

Role in a Rising Rate Environment

In an era of higher interest rates, income-seeking investors often face a dilemma: bonds offer poor yields, while stocks lack steady payouts. YCST bridges this gap by:
- Providing monthly cash flow that's higher than most fixed-income alternatives.
- Leveraging a defensive retailer (Costco) with recession-resistant revenue.
- Offering tax-efficient distributions that avoid the 15% withholding tax on U.S. dividends for Canadian investors.

Investment Advice

YCST is best suited for investors who:
- Prioritize monthly income with a focus on tax efficiency.
- Are comfortable with the concentrated risk of a single stock.
- Want to avoid currency risk while accessing a U.S. blue-chip company.

Recommended Allocation: Consider a 5-10% position in a diversified income portfolio. Pair it with low-volatility dividend stocks or high-yield bonds to balance risk.

Final Take

The Costco Yield Shares Purpose ETF (YCST) is more than just a dividend fund—it's a tactical tool to boost income while riding the growth of a retail powerhouse. For Canadian investors seeking steady monthly payouts without currency headaches, YCST offers a compelling alternative to traditional ETFs. Just remember: the covered call strategy and leverage create trade-offs between income and upside potential. Do your due diligence, read the prospectus, and proceed with a clear understanding of the risks.

In a market hungry for yield, YCST could be the Costco-sized boost your portfolio needs.