Q: I'm interested in an ETF - BANK-T - that holds mostly Canadian banks and major financial companies. I'm surprised that it's yield is about 14%+, and pays out monthly too. That seems to be too good to be true.
My question is how can BANK-T do it, consider the ETFs can only get cash from two sources - dividends from the stocks they hold and from trading gains of those stocks.
Kindly enlighten us on how they can afford to pay such hefty monthly payout? Thanks.
My question is how can BANK-T do it, consider the ETFs can only get cash from two sources - dividends from the stocks they hold and from trading gains of those stocks.
Kindly enlighten us on how they can afford to pay such hefty monthly payout? Thanks.
5i Research Answer:
BANK uses leverage (25%) and sells call options on 33% of its portfolio to enhance income. It has done very well with the sector's gains: up 29.28% this year. But note leverage will work both ways. In a market decline, losses can be amplified. The call option premium does enhance income in all markets, but can and will vary. We are comfortable with this ETF for sector investors who specifically understand the call option and leverage strategy.