Amid lofty, volatile and low-interest market conditions, many investors are looking for investing options for stable income and growth. Kim Parlee talks to Ben Gossack, Portfolio Manager, TD Active Global Enhanced Dividend ETF.
- We are back with that Ben Gossack. He's Portfolio Manager with the TD Active Global Enhanced Dividend ETF, and we are talking about income and ways to do that. It's an interesting market right now because we just went through and talked about where you see laggards, transitioning companies, and leaders.
But when it comes to income, I mean, one way an investor can generate income one way, you know, is dividends and interest. But interest rates don't look like they would doing much the next little while, do they?
- No, I mean, when you look at the US 10-year, we're at 2 and 1/2%. So that's-- we've really come down from where we were. So yes, in this environment and when inflation looks to be sort of still in that Goldilocks phase, where it's not really powering higher, that's going to keep the Federal Reserve at bay.
So it looks like for the foreseeable future, we're still going to maintain this low interest rate environment. And so if you were looking for income, you know, there's a few vehicles, whether it's in government bonds, it's in dividend paying stocks, or there's been a very popular ETFs out there that try to generate more income. And they do that by selling options on stocks. And they're called covered call ETFs, and that's been a popular way that people have been trying to enhance their income.
- Yeah, and one that you know, because as I mentioned, you guys are launching an active global enhanced dividend ETF. So that's part of what it does. Can you explain a little bit about just what that is first off? I mean, you say use options. How? What you actually do?
- So typically, when people do these covered calls, so think about you own a stock, it trades at $100. Let's say you think for next month, so 30 days, you'd be happy with $3 appreciation, so the stock going from $100 to $103, that's a 3% return in one month. You're happy with giving away the rest of the upside. So if it goes to $104, $105, you don't participate.
And you obviously want something in exchange for that. Let's say someone would give you $1 today. So for $1 for 30 days, if you annualize that over $100, you're getting about a 12% yield. At 12% yield seems pretty attractive when annual yields on the US Treasury for 10 years, again, 2 and 1/2%. So it's how you approach it and do it can lead to what could be good outcomes or non-optimal outcomes.
- Let me ask you, so for someone who's looking at a covered call ETF, you can-- there's different ways, or I should say any ETF that generates income. Let me back up to there. There's different ways of evaluating that. So it could be your return could be all income. Your return-- anyone who buys stocks knows, that you can kind of get capital appreciation or you get a combination of both.
- And so I know that we've talked about that as sometimes there's sometimes-- people will use one type of filter, their own personal mental screen in evaluating something. And maybe it's not the one that gives a total picture.
- Yeah, I think when we think as humans, we like to maximize, right? So I want to maximize my square footage of my house. I want to maximize my salary. I want to maximize my car. And so what if I look at just yield on its own and nothing else, 8% yield sounds better than 2% yield. But when you're using these option strategies, the outcome of your investment over a two, three, four, five years can be very different when you're trying to maximize for income.
- Right. So let's take a look. You've got a chart here. I think it shows the S&P 500 versus what? Tell me what we're looking at here and why you brought this graph.
- So I thought I'd be helpful-- you know, a lot of people track the S&P 500. It's a widely covered indice. There's a product from the CBOE where they own the same 500 stocks, and they only give themselves 2% upside every month. So if you think about that 2% upside every month, you're basically giving yourself on an annualized basis a 24% return. Stock market doesn't do 24% every year.
So you say, OK, for giving myself only 2% upside for my investment in the S&P 500 companies, I could be looking at about a 6% yield. You compare that to the S&P that's giving you about a 1.9% yield, so 6 versus 1.9, it sounds a lot better. What's interesting if you look at the-- and we're looking at the chart here. What I did is I put $10,000 in both strategies, and the blue line is the S&P 500, and the white line is the strategy that's trying to enhance the income.
And so the difference is that while, on average, the market is up about 1% every month, most of the time, the frequency of the time, it's actually up more than 1. So just going with that 1.9% yield, you've gotten more return coming from price. And not to say that both strategies-- it depends on what you're trying to achieve. It may be your investment horizon's a one-year or a two-year.
If you put $10,000 in this covered call strategy that covers the market, you're going to get a $600 check, and you're going to check your statement, and you're probably going to get another $600 check. But I mean, the difference in investment over that five-year period, you ended up but about $17,500 if you invested in just the regular old S&P 500, and you're about $14,600 trying to enhance your income.
It's a difference of about $3,000. And over five years, that could be a really nice vacation. So it depends on what you're trying to achieve as an investor. And so again, if it's about income in a shorter time period a covered call strategy like that one might be what you're looking for. And if it's in the long run, you might have to consider a different approach.
- Yeah. And that's something that you guys are considering right now, too.
- Yeah, I think there's an opportunity to consider things back on a total return basis. So your returns at the end of the year are going to be a function of the price movements of your investments and the income you generate. And that typically comes from dividends. But we can enhance the dividends by getting the premiums from these option contracts, whether it's from the calls and the puts.
And if you do it on a fundamental basis and rather than sort of systematic, then you can give yourself certain upsides. So you might have Google, but if you gave yourself 10% upside for 35 days, it's a little bit different than if you gave yourself 2% upside for Google. And that can lead to-- that could lead to a different outcome at the end of the year.
- Great stuff, Ben. Thanks so much for joining us.
- Thanks for having me.