FUND FOCUS I
When it comes to retirement income, it’s good to have options
Portfolio Managers Damian Hoang and Derek Bastien talk about the innovative yield strategy behind Dynamic Premium Yield and Dynamic Premium Yield PLUS Funds.
When it comes to delivering a healthy distribution yield, Dynamic Premium Yield and Dynamic Premium Yield PLUS Funds have been strong performers since inception.
Depending on the fund and series, that’s ~6% yield for Premium Yield over nearly 10 years and ~9% yield over the nearly five-year lifetime of Premium Yield PLUS, which adds a modest amount of leverage* to enhance returns. The annual return for each fund has been higher than these yields paid out. Recently it was announced that these yields were increasing to 7% for Premium Yield and 11% for Premium Yield PLUS (series F), which takes effect on September 29, 2023.
According to Portfolio Manager & Vice President Damian Hoang, “the yields look high, but they are sustainable.” Hoang explains they’ve been able to consistently earn the distribution yield because the gross internal yield in these funds is a lot higher than the payout. Says Hoang, “our value proposition is, ‘Come to us for the compelling distribution yield, but stay with us for the peace of mind offered by the repeatability and sustainability of the downside protection.’"
Speaking of downside protection, Premium Yield and Premium Yield PLUS deliver their compelling yield with just 0.4 and 0.55 of market beta, respectively. “You will hear us talk about how we never underperform the market on the downside,” Hoang says, adding that last year when the S&P 500 fell 18%, Premium Yield Fund was down by just 20 basis points, while Premium Yield Plus was actually up slightly.
With retirement income clearly top of mind for LIVE attendees, Hoang was quick to note that over the past nine and a half years, Premium Yield has paid out over $600 million in distribution income. “Historically, the distribution has been tax efficient,” Hoang says. “For the most part, it has been capital gains with a little bit of return of capital.”
Portfolio Manager Derek Bastien adds that an options strategy is a critical component for diversified portfolios. “It's low volatility, it's low market correlation when needed i.e. low beta in bad markets, which is important.” Bastien adds,
“Last year, both fixed income and equities got crushed, whereas Premium Yield, Premium Yield PLUS were flat. That goes to Damian's point of, we aim for low correlation when markets get turbulent, and we want to have 100% correlation when markets are strong. With Premium Yield Fund, you get volatility much more similar to fixed income, but with way higher returns, and historically, a distribution that's more tax efficient. In Premium Yield PLUS, you get equity-like returns, but in a lot of instances, almost half the market volatility.”
❝
The strategy behind Premium Yield and Premium Yield PLUS
According to Bastien, “What we do at the end of the day is we sell puts on companies that we like, companies that we want to buy 7% to 12% lower. All we're doing mechanically is, when we sell that put, we're effectively committing a limit order, 7% to 12% lower than where the stock is currently trading and we get paid in the meantime.”
Bastien says the funds receive premiums, month in and month out, for the puts written. “Essentially what we're doing is placing all these limit orders on companies we like, hope to buy them on a dip, and in the meantime, we collect the premium that goes towards the gross internal yield that sustains the distribution yield.”
According to Bastien, one key differentiator from existing passive option strategies is that “at the end of the day, we want to buy these companies. We want to buy them at a discount. We're not looking to just collect the options premiums. If they get to our strike price, we're more than happy to pick up a company on sale.”
- Access to a unique portfolio strategy of writing covered options that provides U.S. equity exposure with reduced volatility.
- Diversification benefits offered by options writing through a low correlation to bonds and interest rates.
- Active hedging of equity and currency risk while premiums collected can provide monthly distributions.
- Access to an alternative portfolio strategy, which includes options writing, to provide U.S. equity exposure with reduced volatility.
- Use of moderate leverage* to potentially enhance total returns, including offering a higher yield, but with systematic downside protection.
- Diversification benefits provided by options writing through a low correlation to bonds and interest rates.
Dynamic Active Enhanced Yield Covered Options ETF (DXQ)
- Access to an actively managed portfolio where stocks are selected based on fundamental analysis and sector allocations are not constrained by the need to replicate a benchmark.
- Enhance the intrinsic dividend yield of the quality household brand names in the portfolio through written puts and covered calls, which generate premiums.
- Risk management is key to the Quantamental team’s process and downside protection is offered by the margin of safety in place by writing puts at a discount to where stocks trade.
* The Fund intends to use leverage, primarily through the use of derivatives and also the other means described below, equal to an aggregate gross exposure target of 150% of the Fund’s net asset value to generate additional return. However, the Fund’s aggregate gross exposure may vary from 140% to a maximum of 160% of its net asset value in the short term. The Fund’s aggregate gross exposure is calculated as the sum of the following: (i) the aggregate market value of the Fund’s outstanding indebtedness; (ii) the aggregate market value of securities sold short by the Fund; and (iii) the aggregate notional value of the Fund’s specified derivatives positions excluding any specified derivatives used for “hedging purposes” as defined in NI 81-102.