TD launches an actively managed, total-return focused ETF that invests primarily in dividend-paying equities around the world. Kim Parlee talks to Ben Gossack, TD Asset Management, about the new TD Active Global Enhanced Dividend ETF (TGED: TSX)
- We're back with Ben Gossack. He is the PM for the TD Active Global Enhanced Dividend ETF. And Ben, we were just talking about the fact that yields are falling. People still don't need income when they're looking. So you guys have come out with a new ETF. This is the TD Active Global Enhanced Dividend ETF. Why did you launch this?
- Yes. So TD Active Global Enhanced Dividend or we can call it TGED, which is the ticker. So yes, yields are low. People are demanding income. It's hard to grow that, again, when US rates are at 2%. There is a lot of-- we're not the first product to come out there. There's already $20 billion invested in ETFs that do these covered-call mandates, effectively owning equities and trying to generate extra yield, effectively maximizing your yield at the expense of your price.
So just, you know, your return in any given year is the price of your underlying investments and the income that's generated. And so most of the products that are out there to address this need for income really focus on maximizing the yield, don't give you much on terms of price return. And what we're trying to do is bring the conversation back to total return.
It's important to generate income. And while someone may advertise 7% yield, 8% yield, what we find is in a rising market over time, you don't keep up with the underlying parts of that ETF. So you keep writing these calls, which is effectively giving up the upside so that you get this income today. But then the stocks go through that price. And you have to buy them back and buy them back at higher and higher prices.
- You're getting the income. But you're not getting the total return.
- Right. So we think if you-- and a lot of them follow sort of a systematic strategy. So if I was making a cake, I have one recipe. And it doesn't matter if it's a standard oven, a convection oven, or my grandmother's oven, I'm going to bake the cake the same way. And I do it every month, month on month on month.
And we feel maybe if you have a Procter & Gamble, you should try to generate income a little bit differently than if you're holding Amazon. And Amazon probably has potential to grow a little bit more than a Procter. So maybe you should set your levels a little bit differently than just that systematic approach.
- And the way you're doing that, then again, a number of ETFs have a rules based approach, as you're saying, systematic, the same recipe for every oven. But yours is actively managed.
- Active, looking at the fundamentals that are going on for each particular stock, understanding the risk and reward when we write these options over a given time period.
- And these are calls and puts you're writing, I'm assuming, for these?
- So one thing that we think is a bit unique is that we do calls and puts. You write calls on the stocks that you own. So you are giving up some of your upside. We want to make sure that we can capture a good amount of the upside and still generate a good enough income. And on our puts, effectively what we're doing is we have cash on hand, could we get paid to buy stocks at lower prices?
- You've got a chart here. I want to bring it up. This is taking a look at the strategy behind the ETF in terms of how you look at it versus some of the other strategies out there. And I think on the left what we're going to be seeing is a look at, this is just an MSCI World. This is the dividend that comes from a particular index.
BEN GOSSACK: Right. So we're a global ETF. So MSCI World would be our benchmark that compare us to. And if you buy the MSCI World you're getting a 2 and 1/2% yield. It's OK. But investors are typically seeing something more.
As a core of our portfolio, we're trying to pick quality stocks. That means competitive advantage, ability to grow their cash flow. It would be a mixture of companies that are growing their dividend and companies that don't have a dividend but have a good growth story. That probably gets you about 2 and 1/2% with better, let's say, quality metrics. And then we'll layer on top the income that we get from our calls and from our puts.
- What happens-- because you are employing options. And you guys are the pros in doing this. I mean, the options don't work out the way you want.
- So from our perspective, we find writing a call, writing a put is always better than just owning in stock and doing nothing. And so, if the stock goes up and stays below our threshold, that's great. We capture the income. We capture the price. If it goes through, to me that's just the normal course of business. We don't have a crystal ball any different than anyone else. And then we'll adjust accordingly.
Sometimes you use the calls in order to reduce the position. So in a sense, we're OK. And if it goes down, then yes, the price went down. But we also generated income. So we still end up better.
- Now, you did mention, and made a point of mentioning, that these are global. And why is that important right now?
- We think you want to be in a diversified mandate. And you want to be able to get the best idea. So if you really like air travel, why limit yourself to just Canada and the US? There are some great air travel stocks in France or Spain. Find the best secular stories. And then put yourself in the best countries that are appropriate.
KIM PARLEE: Let me ask, because one of the things I think, we had the chart showing us where they return is coming from in terms of not just the dividend, yield, but everything else. But you are an example of a trade that you placed within TGED. So why don't we bring it up? And you show us how it works we can kind of understand how it works. So I think we've got a chart here we can bring up of Cisco.
BEN GOSSACK: Yeah. So one of our holdings is Cisco. And this is an example of how we're trying to capture income and total return. So we did this trade on May 13. And Cisco is trading around, we'll call it $51.30.
And so if you're following that rules based approach, you typically give yourself 2% or 3% upside. And so that kind of caps you out over here. And then from our perspective when we look at fundamentals and risk/reward, we felt that we were getting a good enough yield and capturing the price movement at $56.
And why is that? Because three days later they were reporting their Q3 earnings. Results could be good. Results could be bad. In fact, their competitor had bad results. And so the market was worried about whether that affected Cisco. And how is their supply chain working through China? Results were really good. And so if we flip to the what happened after the fact--
KIM PARLEE: I think you have to clear the screen [INAUDIBLE]
BEN GOSSACK: OK, no problem.
KIM PARLEE: There you go. We'll bring up the next chart here. There you go.
BEN GOSSACK: So we did the trade over here. And so you see that when the option expired, it closed just below $56. And so what that means versus just a systematic approach is that they may have generated a little bit more income for that 20-day option versus the income that we did because we pushed our level to $56. But they have to go back and buy the stock $4 higher.
So while you may generate $0.60 to our $0.30 from writing that call premium, you have to go and buy the stock $4 higher.
KIM PARLEE: More expensive [INAUDIBLE]
BEN GOSSACK: Whereas we've kept the stock, got the income, and got the total return. Again, if we can do this over and over and over--
KIM PARLEE: Which is what you do.
BEN GOSSACK: --then you'll end up what we consider a better outcome than just focusing on yield alone.
KIM PARLEE: And that's the difference between the rules based and the actively managed, right there. Ben, thank you very much.
- Thank you.