HMAX ETF: The Illusion of High Yield in a Risky Covered Call Strategy

The Hamilton Canadian Financials YIELD MAXIMIZER™ ETF (HMAX) has drawn investor attention for its reported 13.77% trailing yield, positioning itself as a high-income alternative to traditional bonds. But beneath the allure of double-digit distributions lies a strategy that may be setting investors up for a precarious trade-off: accepting excessive risk to capital in pursuit of outsized returns. This article examines why HMAX's covered call approach and concentrated sector exposure make its yield far less sustainable—and far more dangerous—than it appears.

The Covered Call Trap: Yield at the Expense of Upside

HMAX's strategy hinges on writing “at the money” covered calls on its portfolio of Canadian financial stocks. By selling call options at strike prices near the current value of its holdings, the ETF generates premium income that boosts distributions. However, this strategy comes with a critical flaw: it caps upside potential while leaving capital vulnerable to declines.

Consider a simplified example: if the ETF's underlying portfolio (e.g., Royal Bank of Canada or Toronto-Dominion Bank) rises sharply, the call options sold at the money would likely be exercised, locking in gains at the strike price—not the higher market price. Over time, this yield drag could erode capital appreciation, especially in a bull market. Conversely, if the portfolio falls, the premiums received offer little protection against losses.

The data reveals a pattern: HMAX's distributions often outpace its NAV growth, suggesting the yield is partly an accounting illusion. Investors chasing the 13.77% figure may be overestimating true profitability, as the ETF's structure effectively transfers upside potential to option buyers while retaining downside risk for shareholders.

Sector Concentration: Betting on Canadian Banks in a Fragile Economy

HMAX's portfolio is overwhelmingly concentrated in Canadian financials, with 70% of assets in the “big-five” banks (Royal Bank, TD, BMO, Scotiabank, and CIBC) and significant exposure to real estate via insurers like Brookfield Asset Management. This narrow focus creates two critical vulnerabilities:

1. Interest Rate Sensitivity: Canadian banks are heavily exposed to mortgage lending. Rising interest rates—already at historically high levels—could pressure loan demand, reduce refinancing activity, and strain borrowers' ability to repay. A prolonged downturn in housing, a key revenue driver for these banks, would directly hit HMAX's holdings.

2. Economic Downturn Risk: The Canadian economy, tied to global trade and commodities, faces headwinds from U.S. demand fluctuations and China's slowing growth. A recession would likely increase loan defaults, squeezing bank profits and depressing stock prices.

Distribution Volatility: The High-Yield Mirage

HMAX's monthly distributions have fluctuated sharply in recent quarters, reflecting the fragility of its income model. While the ETF's prospectus cites a 13%+ target yield, actual payouts depend on the success of its covered call writing. In volatile markets, the premiums received may shrink, and forced sales of options could destabilize distributions. For instance, during Q1 2025, HMAX's payout dropped 18% month-over-month as equity markets wavered.

Investors chasing high yields often overlook this variability. A 13.77% yield quoted at a peak may mask periods where returns fall below inflation-adjusted rates, leaving investors with neither capital growth nor consistent income.

The Trade-Off: Income vs. Capital Preservation

The allure of HMAX lies in its promise to “maximize yield” through covered calls. But for most investors, this comes at an unacceptable cost:

• Capital at Risk: In a severe economic downturn, Canadian financials could underperform, leading to significant NAV declines. The ETF's lack of leverage may offer some comfort, but its undiversified sector exposure leaves it highly correlated to bank-specific risks.
• Missed Upside: In a rising equity market, the capped upside from covered calls means HMAX investors forgo gains that could outpace the ETF's yield.
• Real Estate Linkage: Exposure to Brookfield and other asset managers ties HMAX to real estate valuations. A property market correction—already underway in some Canadian cities—could amplify losses.

Conclusion: A High-Yield ETF with Low Risk-Adjusted Returns

While HMAX's covered call strategy may deliver headline-grabbing yields, its structure makes it a poor fit for all but the most aggressive income seekers. The ETF's narrow focus on Canadian financials, coupled with the yield-reducing mechanics of its options strategy, creates a high-risk, low-reward profile.

For most investors, diversification remains critical. Consider alternatives like broad-based dividend ETFs (e.g., DVY or VIG) or short-term corporate bonds, which offer more stable returns without HMAX's concentration risks. In a world where interest rates remain elevated and economic uncertainty looms, chasing 13.77% is a gamble where the odds are stacked against capital preservation.

The lesson? High yields are rarely free. When it comes to HMAX, the price of income is far too high.