High-Yield ETF Strategies in a Low-Growth Environment: How Hamilton Enhanced ETFs (HDIV & HYLD) Leverage Covered Call Portfolios and Prudent Leverage to Deliver Consistent Income and Outperformance

In an era marked by sluggish economic growth, persistent inflation, and volatile capital markets, income-focused investors face a daunting challenge: how to generate reliable returns without sacrificing capital preservation. Traditional fixed-income instruments, once the bedrock of yield strategies, have lost luster as central banks maintain elevated interest rates to combat inflation. Against this backdrop, innovative equity-based solutions—particularly those leveraging structured strategies like covered calls and disciplined leverage—have emerged as compelling alternatives. Among these, the Hamilton Enhanced U.S. Covered Call ETF (HYLD) and the Hamilton Enhanced Multi-Sector Covered Call ETF (HDIV) stand out as exemplars of how to engineer consistent income and outperformance in a low-growth environment.

The Covered Call Advantage: Balancing Yield and Risk

At their core, HYLD and HDIV employ a covered call strategy, a time-tested approach to generating income by selling call options on a portfolio of equities. This strategy involves holding a diversified basket of stocks or ETFs and systematically selling call options to collect premiums. The premiums enhance yield, while the strike prices of the options provide a degree of downside protection. Crucially, this approach caps upside potential, but in today's market—where earnings growth is constrained and volatility is a constant—the trade-off is often worth it.

For HYLD, the underlying portfolio mirrors the sector weights of the S&P 500 but is composed of Hamilton-managed “YIELD MAXIMIZER” ETFs. These include sector-specific funds like QMAX (technology) and FMAX (financials), which are engineered to deliver higher dividend yields than their broad-market counterparts. Similarly, HDIV's portfolio aligns with the S&P/TSX 60, Canada's benchmark equity index, but replaces traditional index ETFs with high-yield alternatives. This structural differentiation ensures that both funds start with a yield advantage before factoring in the additional income from options premiums.

Prudent Leverage: Enhancing Returns Without Amplifying Risk

A key differentiator of HYLD and HDIV is their use of 25% cash leverage, a strategy that amplifies returns without introducing the systemic risks associated with derivative-based leverage. Unlike traditional leveraged ETFs, which rely on futures or swaps to magnify exposure, these funds borrow cash from a Canadian financial institution and reinvest the proceeds into additional covered call positions. This approach increases the scale of the portfolio's income-generating capacity without exposing investors to the compounding volatility or liquidity risks inherent in derivatives.

The leverage is applied to a diversified portfolio of equities and options, ensuring that any potential losses are cushioned by the broad-based nature of the underlying holdings. For example, HYLD's 25% leverage contributed to its 12.83% annualized yield as of July 2025, significantly outpacing the S&P 500's yield of approximately 3.5%. Similarly, HDIV's 11.51% yield, bolstered by leverage, exceeded the S&P/TSX 60's yield by over 500 basis points.

Structural Efficiency: Eliminating Overlapping Fees and Maximizing Distributions

Prior to 2024, both funds faced criticism for a “fee-on-fee” structure, where investors paid both the ETF's management fee and the fees of the underlying ETFs. However, a strategic restructuring in early 2024 eliminated HYLD's and HDIV's management fees and consolidated their holdings into Hamilton-managed ETFs with no overlapping costs. This move not only improved transparency but also directly increased monthly distributions. For instance, HYLD's monthly payout rose from $0.121 to $0.145 within a year, reflecting the efficiency gains.

The absence of management fees and the use of a Dividend Reinvestment Plan (DRIP) further enhance investor returns. By allowing unitholders to automatically reinvest distributions, the funds enable compounding—a critical tool in a low-growth environment where capital appreciation is harder to achieve.

Performance in a Volatile Market: Outperformance and Resilience

The effectiveness of HYLD and HDIV's strategies is evident in their performance metrics. As of June 2025, HYLD delivered a 13.98% total return for the year, outperforming the S&P 500 by over 5 percentage points. HDIV's 23.66% annual return, meanwhile, significantly surpassed the S&P/TSX 60's performance, particularly in sectors like energy and financials where covered calls helped mitigate drawdowns during market corrections.

This outperformance is not accidental. The combination of sector diversification, income generation via covered calls, and disciplined leverage creates a portfolio that is both resilient and growth-oriented. For example, during a June 2025 market selloff triggered by inflation concerns, HYLD's portfolio of covered calls limited losses in equities, while the cash leverage ensured continued income generation.

Strategic Considerations for Investors

For income-focused investors, HYLD and HDIV offer a compelling solution to the dual challenges of low yields and market volatility. However, their strategies are not without caveats:
1. Capped Upside Potential: By selling call options, the funds sacrifice a portion of potential gains if the underlying equities surge. This is a necessary trade-off in a low-growth environment but may deter investors seeking aggressive capital appreciation.
2. Geographic Focus: HYLD is ideal for those seeking U.S. equity exposure, while HDIV caters to Canadian markets. Investors should align their allocations with their regional economic outlooks.
3. Leverage Risks: While cash leverage is less risky than derivative-based leverage, it still amplifies losses in extreme downturns. Investors should treat these funds as part of a diversified portfolio rather than standalone positions.

Conclusion: A Blueprint for Income in Challenging Times

In a world where traditional income strategies are faltering, the Hamilton Enhanced ETFs demonstrate how structural innovation can unlock value. By combining covered call strategies with prudent leverage and fee efficiency, HYLD and HDIV have redefined what is possible in a low-growth environment. Their performance underscores the importance of disciplined portfolio construction and strategic adaptability—principles that will remain vital as markets navigate an uncertain future.

For investors seeking to balance yield, growth, and risk, these ETFs offer a blueprint worth considering. As always, due diligence and alignment with individual risk profiles are essential, but in today's landscape, the Hamilton Enhanced approach provides a rare blend of innovation and practicality.