Ben Gossack, VP & Director, Portfolio Manager, and Trevor Cummings, VP, ETF Distribution, both from TD Asset Management (TDAM), join Pierre Daillie for a deep dive discussion about the innovative ways the asset management team at TDAM are enhancing investment income without sacrificing total return in their enhanced dividend income strategies.
Um, I’d say, Pierre, even coming out of the great financial crisis, uh, we were in a pretty low interest rate world. And, I’d say, your average investors probably in a 60/40 portfolio, so 60% equities, 40% fixed income. And even, you know, we think, you know, we had low rates then, maybe even lower rates now, but that portfolio was probably yielding about two and a half percent. Um, now, the average inflation was about tier two and a half, but I’d say most people didn’t really see the bite, you know, when it came to consuming goods and services.
And what’s happened with COVID is we, you know, the central banks and governments had to take such extraordinary measures, uh, in order to sort of bridge this, uh, our economy, uh, to the other side of this healthcare crisis, and that meant lowering interest rates. And so that two and a half portfolio that, you know, many investors were already complaining was too low, um, is probably yielding about one and a half percent now.
And now, the, uh, inflation that was around two or two and a half is coming out around four to five and people are really starting to see it and they’re seeing it. And, you know, when they’re trying to buy a car, uh, they’re definitely seeing it in house prices, uh, the grocery store. So now they really feel it and they really feel that sort of that one and a half percent yield, uh, and I think that, you know, fuels even more pressure.
Um, I kind of look at it this way. You know, if I was earning two and a half and now I’m back down to one and a half, overnight, I gotta double my nest egg [crosstalk 00:03:13] or I, I need to find stuff that, you know, generates a lot of yield. Um, and in many cases, you know, you definitely will move yourself up the risk curve, uh, if you’re trying to find, you know, assets that’s for awful lot of yield because as all things, you know, nothing comes for free. So I’d say that, that, I think that generally sort of lays out, um, the, the challenges that savers are facing right now, um, you know, on this side of, of the, the COVID crisis.[00:03:40] Pierre Daillie: Yeah. I mean, it’s, it’s actually, it’s huge when you think about it. I mean, if you have a million dollars, I mean, a million dollars isn’t what it used to be. Um, you know, at two and a half percent, that’s a $25,000 income. And then if suddenly, you know, you’re looking at one and a half percent that drops to 15,000, given that you would wanna have something similar, you’d have, you would have to have close to $2 million in order to get that, that 25 to $30,000 equivalent.
And then, again, I mean, you know, what kind of retirement, uh, are we talking about with $25,000? So it’s, it’s, it’s extremely challenging, I mean, in terms of, of what the re- what the liabilities are, what the requirements are for, for anyone facing retirement in, in, uh, you know, five, 10, 15, 20 years, whatever the outlook is for, for any given investor, uh, to the goalposts of being moved quite far away just by the Fed and by the intervention in the, you know, in the economy.[00:04:39] Trevor Cummings: I think, you know, you, you could say the 4% rule is dead, right? William Bengen, a quarter century ago, did this study and said, “You know, you should be able to take 4% of your portfolio, adjust it for inflation every year, and, you know, 99 times in a hundred, you’ll, you’ll never run out of money subject to some tail risk.” Uh, those days are gone. You know, I think, I think there’s been this secular shift towards investing for yield with the rise of fee-based and discretionary asset management. So just within the industry, there’s more appetite for yield so that the financial professional, the investment professional can take their fee without touching the principal of an account. There’s demographics at play. Certainly, you know, w- we’re not getting any younger, uh, uh, on the panel today, but that’s Canada at large.
You know, stats can says there’s more Canadians 65 plus than zero to 14. There’s more seniors in Canada than children, and we’re never going back. So more and more people are looking for yields and there just isn’t any out there unless you stretch. You know, when you look at, say, just passive vanilla indexes, uh, the emerging markets index pays a higher yield than the TSX at this point. And even still, it’s about two and three quarters versus about two and a half right now. So neither of those are gonna get anybody close to, to the 4%.
Now, there are some indexes out there that do yield four, but you’re talking EM currencies, you’re talking global high yield bonds. You’ve really gotta take on sort of, uh, uh, a non commensurate amount of risk in order to earn that kind of yield. So investors need to do more than just pursue, you know, pass the classes with higher published yields. They’re gonna need to do something else, whether that’s innovation, whether there’s some activity within the portfolio, but just, you know, picking and choosing asset classes and then adjusting your withdrawal rate for inflation. That’s not going to work in him any longer.[00:06:47] Pierre Daillie: It’s funny. You know, while you were talking, Trevor, I was just thinking of the lifestyle creep. You know, the, the simple answer is, uh, what’s the solution to this, you know? Uh, we’re gonna have to make more money [laughs], right? But it’s not that simple. I mean, I, uh, you know, investors are doing a lot of crazy things, uh, you know, in this market and, and some of it is because of, uh, you know, this idea that there’s no alternative, uh, or tenor. Um, but so from your, from your guys’ perch, from where you sit, you’re, you’re, you’re probably receiving a lot of internal research from, from within you, you know, TD’s, um, internal findings and research from, from market research within the firm.
What is it telling you that investors are doing? You know, what are some of the crazy things that you, that you think are crazy that investors are doing in order to satisfy this liability of, you know, 4% plus in order to, to get more, more income from their assets? And what are some of these…. what are, what are some of the things also… let’s, let’s also, um, you know, pad that with, what are the things that investors aren’t doing?[00:08:01] Trevor Cummings: So, I mean, I’ll take that one first, I guess. You know, when, when you think of things in the context of exchange traded funds, you know, outside of the passive, you know, plain vanilla benchmarks, one of the biggest categories out there is the dividend ETF. And, you know, a, a lot of them, I’d say most, all of the dividend ETF universe, one of the very first things they do in that, that kind of funnel where they’re taking many securities to phew is they screen for yield. So, you know, take a hundred names in an, in a, in a, in a geography or an asset category, sort them from highest dividend to lowest dividend and, you know, knock at the bottom half and, and, and don’t give them a second thought.
And the trouble really is that there are some really incredible opportunities in the bottom half of that list. You know, if, if you’re led by the nose to what the dividend yield is, the first problem is you might be missing out on really great opportunities. The flip side of that coin, though, is that the top half of that list might be the riskier hackathon. I mean, you never know for sure, but certainly some of the names with high yields have high yields to reflect the risk inherent in those specific companies.
You know, a hundred dollars stock with a $3 dividend is a very basic 3% yield. Well, if that stock falls over the next 12 or 15 months to $50 a share, you know, the, the yield, uh, is, is going to show 6% on that security. And, and if I don’t do any due diligence, if I just sort of call it a day and, and, you know, blind, blind faith invest, well, you know, I’ve, I’ve invested in something that, you know, hopefully will stop declining in value, who’s to say, [crosstalk 00:09:49] um, but I’m, I’m fooled almost really by this illusory 6% yield when in fact that company might be in such meaningful distress that that dividend itself is at risk.
So, so you can’t just screen for yield. And, and I know a lot of the dividend ETFs are gonna do a little bit more. They’re gonna look at the track record of that company. They might look at some quant metrics, um, but, uh, again, the, the, the first point stands. There are some really, really great opportunities in the market out there that maybe only have a yield of 1%, maybe have a yield of less than 1%, maybe have a yield of zero, you know. And so I think it’s important to be more of a holistic in, in, in sort of interpreting, you know, where the opportunities are to start.[00:10:33] Ben Gossack: Yeah. Pierre, I’d say [crosstalk 00:10:35], again, anecdotally, I mean, you hear stories about people doing private lending or private mortgages. I mean, depending on the sophistication of investors, people might go out there and take on all that risk. Um, or now we’re hearing stories about, um, decentralized finance that, you know, again, [crosstalk 00:10:52] don’t get anything on their money market and moving into, again, some of these esoteric areas.
I’d say, uh, kind of picking up from Trevor in, in sort of the traditionalist, let’s say, the ETF or mutual fund space, um, you either are chasing the high dividend yielders, and that will be sort of your telcos or utilities or some of your staples. Um, but from a fundamental perspective, they might be facing, you know, negative earnings curve. And then the challenge, I think, if, you know, for people that were going after the blue chips, um, is that their stocks have… uh, their companies I’m actually done quite well because of COVID and they’ve seen revenue growth and, and margin growth, and we’re seeing record free cash flow growth, um, and that’s being re- reflected in the price, uh, and in many ways the dividends having kept up.
So, um, the dividend yields that are out there are, are quite small. Um, so that, that, that is challenging, I’d say, for anyone right now to sort of, you know, where they were going, you know, in the traditional. I’d say, what people are not doing, uh, to pick up on, on the other part of your question-[00:11:56] Pierre Daillie: Right. [00:11:57] Ben Gossack: …whenever we find people chasing, uh, income, they never look at their total return. Um, so it’s, it’s… I, I call it like the, um, the used car lot sticker. It’s just, look at the big sign that says 6%, 8% yield, only focus on that. [00:12:14] Pierre Daillie: Yeah. [00:12:14] Ben Gossack: Don’t look at the rest of the car, just focus on a sticker and that will be great ’cause people are like, “Wow, you know, that’s like a 6% return. That’s my yield.” Um, and they don’t… you know, your, your real returns are a combination of the price, of a security and the dividends. And what ends up happening is sometimes the price’s overwhelmed. So the stock could be down 20%. It doesn’t matter that you got that 6% yield, you’re actually going behind. [00:12:39] Pierre Daillie: Yeah. [00:12:39] Ben Gossack: And again, the, the fact that people aren’t looking at total return, um, again, we talked about, you know, in some cases you need to double your nest egg overnight. Well, if, you know, you’ve invested in these securities thinking that you were getting income, but your capital is actually depleting on you, you’re far though. To even get back to where you were, just, you know, becomes even… you know, it’s, uh, as they say, you know, in the same sense, you know, we’ve got to dig our way out of the problem, um, [crosstalk 00:13:06] if you just kind of keep going lower and lower.
So, um, I’d say, from my perspective, and I think Trevor would share that, the biggest thing that we find that people miss when they’re looking out for income is they forget about price, um, and they become maximalists. And in that situation, you know, it can work out, but most of the time, uh, it does… it typically leads the capital losses.[00:13:29] Trevor Cummings: It’s like [crosstalk 00:13:30] the fuel economy and the maintenance cost of a car versus the windshield price. Yeah. In deed, you’ve gotta do more due diligence than just the surface. You know, I think one of the other siren songs really in, in the ETF space in particular is, is that 20 odd billion dollars worth of systematic covered call or buy rate ETFs. And, you know, they all kind of have a really generous yields, but they do indeed come at the cost of brace return. Um, and in, on [crosstalk 00:14:01] a total return basis, very, very few of them beat, uh, a, a, a fairly standard buy-and-hold strategy of, of the asset class or the category.
So I think those are kind of those real, uh, observations really of the, the siren song of dividends and really the, the even, you know, amped up yields that you can find in covered call ETFs, led us to thinking about, you know, what, what can we do here at TD asset management in the ETF space that takes elements of that, delivers some yield improvement, but also delivers additional total return to, uh, to investors.[00:14:38] Pierre Daillie: There’s 30 or 40 years of recency, you know, of 60/40 working and continuing to work. And so the, the drive or the impetus to, to change away or to, to do things differently away from the 60/40 model that has worked for so long and that people have gotten very comfortable with, maybe is the better way to put it, is that, is that it has left investors with sort of a knowledge gap.
You know, I always, I always go back to this idea of known knowns, known unknowns, and unknown unknowns. And I, I’m hoping that by the end of this conversation, you know, that we’d, that we’ll get into some of the known unknowns and some of the unknown unknowns even. I think part of the problem is that investors and advisors, like for that matter, um, don’t necessarily know what’s possible out there in the marketplace. There are things that are available today that weren’t available, you know, two, three, five years ago.
So let’s talk about what you guys, uh, your, your research uncovered that, that bridges the gap between the two areas of total return and income, because most of the strategies that are in the marketplace right now only do half or, or one of those two strategies, but very few, or, or, or rarely do they do both. And this was really, uh, a, a gap that you work to, to fill. So maybe talk about some of the things that you discovered in marketplace or solutions that you innovated that addressed that.[00:16:02] Ben Gossack: Fair. So I’ll give you some of the history of the product. And, uh, the genesis sort of goes back even the 2016. You know, our, our industry is quite competitive, um, and I think Trevor was saying that, you know, cover call strategies are 20 billion or 30 billion in assets under management, um, but they were, they’ve been gathering assets for quite a few many years.
So, um, at that time, TD Asset Management didn’t have any ETFs, but we, we, we have a, a great dividend growth franchise. Uh, and, you know, the, the ask was, you know, what’s going on in, in the, in the offer market? How do we participate? Uh, and so, you know, we looked at it from the call side. Um, so that’s basically giving up, um, appreciation for income today, uh, because that’s where most of the assets that we could see that were, uh, were gathered… you know, those, those are the funds that we’re gathering the most assets. Um, and they were all typically systematic.
Um, many of them are sort of sector focus or equal weight, um, but they basically follow the same sort of, uh, textbook strategy, maybe two or 3%, um, upside in, in, on a, on a rolling monthly basis. Uh, and then, um, you know, and that’s typically because you’re giving up that much upside, you know, will generate a good amount of yield. And so you’re seeing these distribution yields of 5, 6, 7, 8%.
Um, that, we found, uh, typically underperformed. So even back in 2016, we were looking at the, the, the market and our, and our performance, and we found that that typically underperformed the underlying investment. So you were always better off not paying the member fees, not collecting the juicy distribute shares, and from a total return perspective, so hating on, you know, lower amounts of income. Um, you always surpass that strategy, um, and so you were better off just buying the underlying.
Um, and so at that point in 2016, we were just this, you know, this, that doesn’t seem to work. I’d say, one of the things that really unlocked a, a full area for us across many of our funds, um, was not focusing on where everyone was, which was on the call side, but focusing on the put side. And we’re not talking about… you know, when people think about ports, they’re like, “Oh, that- that’s insurance. Uh, ports are there to buy protection.”
Uh, but for every contract, there is a buyer and a seller. And so if people are buying insurance, who are they buying insurance from? Um, how much are they put out paying? What are these premiums? And how much deductible are they willing to give the insurance company? And for us, that was a major law, um, because that strategy is basically premised on, um, Apple will say owner fear or owner, uh, fear mitigation. So I own my…
I always say on my car, I’m worried about a flood or a fire. So to make myself feel better, I’d pay these option… you know, I pay these premiums. It’s no different for an asset like, you know, Apple or Microsoft or, or JP Morgan. You know, people are willing to… for their entire portfolio, are willing to pay this insurance. And [crosstalk 00:19:13] this insurance is quite… well, uh, the, the best word I can say is yieldy.
And so in our dividend growth strategies, and we were looking at picking up, again, through a cycle on average, a mid-teens yield. Now, the way it works in ETFs and mutual funds is you have to back it with cash. So think of this as the cash that would have been sitting around waiting for some market dislocation, or I think of it as the cash you were sitting, you know, just ’cause you wanted to keep a buffer at, uh, at the bank account.
And so if I were to tell you, you know, Pierre, you could earn a mid-teens yield on your cash, he’d say, “Yes, sign me up. That’s what I want.” Um, [crosstalk 00:19:56] so that we’ve been running this point strategy, you know, since… I think, you know, we started it in one fund in 2017. It’s across 11 funds plus the two ETFs that I manage. Um, and, you know, that, that’s roughly about two to 3% of the cash. It’s just earning this mid-teens yield.
You know, through this crisis, it’s been, you know, multiples of that, but, again, I think, like, on the longterm, it’d be mid-teens. So I’d say that that was the one on lock.
Um, the ask, you know, when we wanted to get into the ETF space, um, was, “Hey, there’s all these cover call strategies. Can we get our share of wallet?” Um, and so my response was, “I’ll build you a strategy, but I don’t want to replicate what’s out there because, again, it goes back to people have a challenge for income, but they’re seeking the wrong product because nothing changed. They still underperform on a total return basis. The big unlock for us here was to look at everything as sort of one, you know, dynamic moving body, which is actively pick stocks and then actively rate calls.[00:21:03] Pierre Daillie: Right. [00:21:03] Ben Gossack: So, um, I can’t tell you the pushback I got because it was very different than what was out there. So I said, I didn’t want a rolling monthly schedule. And he said, “Are you sure? That’s what everyone does? Like, let’s talk to the dealers. Let’s… like, everybody knows that you’re rolling on a monthly.” “Well, we could roll weekly, you know, biweekly, monthly.” He goes, “We just unlocked that part.”
And then the other big takeaway for us was, you know, let’s try to give ourselves as much space above, so not those two to 3%. Let’s treat companies the way that they should be treated, which is differently. You know, you would treat Amazon differently than you would treat, you know, a company like Shopify, that you would treat, you know, NextEra utility. Uh, [crosstalk 00:21:45] and so you would give yourself different head space above when you, when you write these contracts.
Uh, and then lastly, um, all of the assistant ex-strategies have to write the contract. One thing that was a bit shocking for people was we may not write the contract, that we don’t think that we’re getting paid to write that contract. So we actually can take less income over the short term, um, rather than put us in a situation where we write this contract, doesn’t pay as much, and then the stock goes through our, our, our, our, um, our hard level.
The last thing I’ll say and I’m sure I, I know I’ve, I’ve spoken for quite a bit. I know you probably are… the questions are building up. Um, but, uh, the last thing I’d say, the other big unlock that we did here that was different than, I think, many of the different strategies was, for an income producing product, we said we were gonna own stocks that don’t pay a dividend.[00:22:38] Pierre Daillie: That’s one of the more innovative things about your strategy. It’s, it’s very unique. It’s, it’s a… you know, on one side, you’ve got your handpicked dividend payers and on the other side, you’ve added this element of growth in these non, non dividend paying stocks.
When you add that extra layer on top, when you stack the, the buy-write strategy on top, uh, you’re actually harvesting income from the growth in your strategy. I guess one point I wanted to bring up was the point you made about the systematic strategies being obliged to write the calls or write the puts, whereas you would have the discretion to decide whether or not to do that. You can be like Casey at Bat, right? You don’t have to swing for every ball. You know, that’s one of my favorite analogies by the way, from, from Buffett, which is that, you know, just because someone throws a ball at you doesn’t mean you have a swing for it.
So let’s divide the two segments. Let’s first talk about dividends. And what are you looking for in particular in the dividend sleeve of your strategy? What kind of companies are you looking for? Uh, you know, there’s the stalwart dividend payers maybe. I- I’m not sure if that, how that forms a baseline for your portfolio. And then, and then, uh, there’s the growers.[00:23:55] Ben Gossack: Sure. Um, so we’ll break it, you know, down with stock selection. And one thing, um, I’ll say, a big unlock for me, um, was, you know, not falling… you know, a lot of times it’s like growth versus income and then we bucket stocks. And so, uh, for me and my style, it’s looking at, uh, secular growth trends. Uh, and that could be, you know, before COVID, it was travel. Travel was an amazing secular growth trend. It was every year, more and more people wanting to travel. Uh, it could be, uh, on-premise IT infrastructure moving to the cloud. Uh, it could be payments, you know, as simple as, um, cash going to credit cards and debit, and you’re following that trend. Uh, it could be health and wellness trends.
And so I like to look at things at how you sort of multi-year for risings and they keep sort of, a nice sort of line that goes from the bottom left of the chart to look the top, right.[00:24:53] Pierre Daillie: Yeah. [00:24:53] Ben Gossack: And then looking for stocks that then, you know… and I, I, I call them sort of forces, but the, you know, can, are the best forces to write or to take advantage of that. Uh, so in the case of travel, it could be, you know, air bus, uh, Boeing before all its problems. It could have been an online travel agency. It could be a hotel, but you look along the value chain and you say, “Okay, which are… you know, what are, what are these companies? You know, are they good operators? Uh, and, you know, will they, you know, benefit the most from these secular trends?
And in some cases, you know, we run a global fund. Um, the best person we find, you know, might reside in the UK. It might be in Spain, might be in Japan, might be in, in the US. And that’s sort of how we land on our sort of global allocation, uh, and then whether they pay a dividend or not. Ideally, we want companies… you know, we’d like to be around the same yield as the index, um, but that’s sort of how we do our styles, you know, stock selection and all of the same, you know, quality rules for us apply. We want them to grow their free cashflow. Uh, they have to have, you know, uh, quality management. They need to, you know, have an avenue for growth, uh, and they have to have good balance sheets.
Uh, so that, that’s, that would sort of thrive, um, for us, and I’d say our bread and butter for TD Asset Management and it would apply for these two ETFs. And when it comes to dividends, you know, we like dividend growers. Um, so, [crosstalk 00:26:20] again, these are, uh, you know, companies that, you know, have confidence that they can keep… you know, because of, you know, they’re growing in new markets, new products, new services, that, you know, they can repeatedly and consistently grow and grow their dividend. You know, that, that sends off, you know, positive signals, um, that the business strategy is working out, the management team is cohesive, you know, and, and understands the direction in which they’re growing into.[00:26:44] Pierre Daillie: Now, what about the, uh… let, let’s talk about the growth side. How do you go about picking, uh, the businesses that, that you’re taking stakes in, in that, in that side? [00:26:55] Ben Gossack: Right. And so, again, we’re trying to look at them in one bucket, which is, follow the secular trends. So let’s walk through some examples. So, and we’ve been in- [00:27:05] Pierre Daillie: And these are the non-dividend payers [crosstalk 00:27:07] too, I, I just to clarify. [00:27:08] Ben Gossack: Absolutely. So, you know, we can look at, uh, let’s say we’re looking at the cloud, uh, movements, the cloud or e-commerce. Uh, you could think of a company like Amazon, uh, would definitely be your poster child. Uh, so a company that has compounded quite nicely from a price perspective, you know, but it doesn’t pay a dividend wouldn’t be looking to pay a dividend. And we see some strategies and we’ll try to slip in Amazon in, into their, uh, their funds and say maybe one day they’ll pay a dividend. Uh, we’ve seen that from other income products, um, but I never wanted to apologize for owning a great company. Uh, and that’s why, um, you’ll see, later on, when we talk about the calls, that we can create a sort of a synthetic income stream on top of a company like Amazon, um, for it might be, you know, on payments or, or in financial, um, tech companies.
And we, we like a company like JP Morgan. Um, but why should that also stop us from owning a company like Square, uh, which is [crosstalk 00:28:07] also, you know, slowly building a digital bank, you know, piece by piece. So for us, it was at the core of the portfolio. Um, why should we let that sort of “I have to have an income bucket, I have to have a growth bucket” stop me from [crosstalk 00:28:22] ordering quality franchises? And then, you know, I’d say for the most part, um, we’re allowed up to, you know, 30% non-dividend payers, but, you know, the bulk of the portfolio are companies are paying a dividend, growing a dividend.
Um, to give you a perspective on how much they’re growing, um, even year to date, uh, the companies, uh, that we own, you know, are growing their dividend, you know, 10 to 12%. Um, so, you know, again, think about inflation running at four to five, you know, our companies are paying us these checks and these checks have grown, you know, 10 to 12%. Um, and that’s just, you know, again, from the income side.
Uh, and, and so, again, for us, the big unlock is not to, you know, think about companies as this is a growth company, this is an income company. Um, let’s just look at secular trends and then fill the best portfolios that can take advantage of these trends.[00:29:17] Pierre Daillie: It makes the overall strategy, definitely more compelling. Dividends on their own might not be so enticing when you layer in the growth element of your strategy. Sometimes investors might look at a, at a strategy and say, “Well, how come this strategy doesn’t own these other companies?” And, and then, you know, the answer to that is that they’re not allowed to. It’s not in their mandate. So that’s what you’re referring to when you say unlock. You’ve got this opportunity to participate in some truly great secular growth names like Square, like Amazon, uh, long-term and then, and then not, not do that at the cost of not receiving dividends because now you’ve layered in this other strategy on top of that, which allows you to harvest income from stocks that aren’t paying any income.
I think that’s the part where, you know, I mentioned, you know, known unknowns. I think my sense is that advisors have a preconceived notion, uh, perhaps, that, you know, stems from, you know, getting on the internet, doing some reading about buy-write. Personally, I went looking at, at what was available in terms of intelligence on, on buy-write strategies, and what I found wasn’t compelling. The systematic buy-write, when you’re just doing things, you know, in a machine like way, you get machine like results. Everything sort of flattens out in averages and-[00:30:40] Trevor Cummings: I don’t think there’s any mal-intent on, on the part of, uh, of a manufacturer who does a buy-write index. That said, you know, [crosstalk 00:30:49] I think there’s some reputational risk to doing so. I, I mean, I’ll, I’ll put my tinfoil hat on for a moment. You know, there’s a number of different ways you can do it, right?
So, so you can write on half the portfolio, maybe half the portfolio you write calls on and the other half you let go free. You can write on two-thirds, 40%, three quarters. Yeah. So, so everybody out there who’s employing that strategy and offering that in the marketplace chooses, makes a decision in their rule set how much do we wanna write on. That’s number one. Number two then is where do we write? Do we write at the money? Because then it’s almost certain we be called away and, and we’re limiting our upside. Uh, that’s where more yield is though. Do you write 2% out of the money? Your batting average is still gonna look pretty poor, though. Do you write 5%. Do you write tenner? You know, there’s no premiums to earn if you write two-third of the money if you’re only going out 30 days.
And that’s the third piece is, you know, the, the defacto standard seems to be 30 days, four weeks at a time these days, but do we set a rule? Uh, you know, do we, do we include one of the rules to be, we write seven week calls, I don’t know, whatever? You know, the, the trouble with it is you get these set of rules, how much we write on, what portion of the account we write on, uh, how far out of the money do we write, and how, what kind of time value do we wanna try to earn through this strategy?
If you get five different providers, five different manufacturers, each with a slightly different set of rules, the fact of the matter is this, there is one winner and there is four losers, right? There’s, there’s reputational risk to doing a systematic cover call because you can do all of your research and all of your homework and, and, and yet forward-looking, COVID, right? The, the game might change and you might not want to be writing calls on a systematic basis through summer of 2020 when you had this tremendous snapback.
So, you know, the, the tin foil hat, the conspiracy theory sort of part of this is you don’t see any, uh, or you see very, very few systematic covered call ETFs being launched new at this point because there’s more downside than upside to a manufacturer doing that. They might get lucky or despite their best efforts, they might end up as the fifth of five providers in a, in a category. So, you know, being flexible, being active, I think, is really the name of the game. And in the, imi- imitation is the sincerest form of flattery kind of camp, now we’re starting to get providers who are looking at, you know, some of the elements of our strategy and trying to, uh, to chart that path instead.[00:33:35] Pierre Daillie: And when advisers are looking for, you know, third party intelligence on writing puts and calls as an income strategy, they’re finding that the majority of the intelligence that’s available is not properly informing them and therefore they’re getting, uh, misconstrued impression of how it can work, how you’re actually applying a pinpointed strategy to, to each of these put writing or call writing decisions. [00:34:02] Ben Gossack: Um, so, here’s a couple of different avenues to sorta jump off. I can tell you kind of… and we, we, we had an idea, uh, and then we come to market. Um, one of the first things I got asked from, let’s say, uh, your advisor is, “Oh, that, that’s interesting. What’s your backtest?”
And when you’re applying active stock selection, active call writing, the ability to not write, um, the put writing and you do it in one holistic package, I was like, “There is no backtest.” Because how can you go back in the, in the past and say, “I, I would not have written that contract or I would have…” You know, it’s, it’s basically cherry-picking. And so that was… I’d say that was the first push back, which was, um, novel. Um, I feel more comfortable with a backtest and that goes back to, you know, smart beta, low fall, all these [crosstalk 00:34:59], even the cover call.
Um, whether it’s good or not or you agree with it, it has its challenges, it’s, you know, different parts of the market, it works better. Um, you could always fall back and say, why’d you buy it? Well, um, this, you know, backtest for me, it works out. It just didn’t work in this environment or it worked in this environment. And so that was, I’d say, you know, the… it would… some of the answers were novel, you know, come back to me in one year, uh, come back to me in two years. Or the standard industry line, you know, come back to me in three years. So, uh, some of it was sort of, the sort of pushing us off and then what I’d say, you know, “Watch us. Like, put us on your… you know, watch us, watch us.” Um, the other thing-[00:35:39] Pierre Daillie: Yeah. I, I think, I think the problem with rules based investing is not the idea itself, but often it’s the rules, right? [00:35:47] Ben Gossack: Well, would the rules give people comfort? ‘Cause this one, it goes back to what Trevor was saying. None, none of these products have any malice. If anything, the systematic cover’s call strategy is quite elegant in that it’s completely transparent. [00:36:02] Pierre Daillie: Yeah. [00:36:02] Ben Gossack: Everybody, you know, whether it’s the dealer, uh, the market makers, the shareholders, the advisor feels, like, everything that’s going on, which is also one of its flaws. [00:36:13] Pierre Daillie: Yeah [laughs]. [00:36:13] Ben Gossack: But, but from a product perspective, could you ask for anything more? You want transparency? That, again, I’d say from that perspective, it solves, you know, that comfort, that, you know, I sold my clients a product, I know exactly what it’s doing. Again, it may not be efficient. Some of the problem that I know, I could explain it to my client. I’d say, the other pushback that we got or, again, it it’s, you know, um, we’re not new to the… you know, this isn’t an emerging space for people or, you know, the land grab? You know, we’re coming into a space that, you know, has entrenched ideas about cover call strategies and has already parked a lot of money. Again, we talked about 20 or 30 billion assets on demand [crosstalk 00:36:52] within these strategies. Uh, and so for us to come and say- [00:36:55] Pierre Daillie: That’s in Canada, right? Yeah. [00:36:58] Ben Gossack: And that’s just in Canada, right? [00:36:58] Pierre Daillie: Yeah. [00:36:58] Ben Gossack: Uh, and then for us to come and say, “Um, oh, that’s not a really great product from a tot…” Like, have you ever looked at it from a total risk return perspective. Um, that’s not a very good strategy. And Pierre, I can tell you, I’ve been in a room and we… I had good energy with an advisor and as soon as I said that’s not a great product, the energy level just dropped. Um, [crosstalk 00:37:20] and because he owned it and he had his client sitted.. and, again, he was like, “Okay, but it’s okay, right? It’s transparent.” Um, but, but again, it’s- [00:37:28] Pierre Daillie: Well, we, we get very, you know, uh, we’re… making decisions is difficult, isn’t it? I mean, it’s not… you know, there’s a lot of energy required and there’s a lot of, there’s a lot of commitment required when you make a decision about having something on your shelf that, that, that you’re gonna recommend actively to your clients. I think, I think, you know, we get vested emotionally in these things. So I’m not surprised to hear, hear that anecdote, which is, which is that, you know, his face dropped when you said it’s not really a good product, but I’d rather hear that from someone like you than, than from, you, you know, the average investor and, and- [00:38:02] Trevor Cummings: Or a client. [00:38:03] Pierre Daillie: … you know, coming from you, you know, you’re objectively looking at it and saying, it could be better, it could be much better. [00:38:08] Ben Gossack: And I’d say, you know, the last, you know, um, I’d say the last challenging bit that we found, um, was, I’d say, you know, we, we came to market in 2019. I’d been working, you know, on the idea for, you know, almost a year. We had come to market in 2019. Uh, arguably, this has been a… it was a, there was a major, you know, stock market bull run from, we’ll call it, you know, February or March, 2009. Um, and that there’s this strong rules or, I, I, I’d say maybe even a heuristic, uh, uh, you know, a rule of thumb when it comes to the cover call strategies, which is, um, they don’t work in a, in a, in a full market, [crosstalk 00:38:48] or, or I would call it a very fast rising market. [00:38:50] Pierre Daillie: Exactly. That was, I mean, that was one of the things that, that kept coming up in, in sort of my sort of background research on covered call writing and buy-write strategies was that you don’t wanna own something like this in a, in a strong, in a strong market, in a bull market because you’re, you’re giving away some of your upside for it. [00:39:08] Ben Gossack: Exactly. I mean- [00:39:09] Pierre Daillie: Yeah, sorry. [00:39:10] Ben Gossack: And then, uh, it’s good in a, a sideways market, uh, [crosstalk 00:39:14] and it’s great in a falling market. Um, but Pierre, you know, I’m gonna play you on the spot. Um, you know, we have, we have a major fall market right now, uh, since March 23rd last year. Um, so are we near the top? Are you gonna switch from your uncovered strategy to your cover strategy? I, I, you know, I think that’s a lot to ask, even for myself. Um, you know, we, we don’t, I don’t call tops and bottoms. Um, you know, I look… again, I look for my secular trends and make sure those trends haven’t broken or the companies, those forces, you know, don’t misdirect themselves from the, the, the, the strategy.
Um, but for me to say, “Oh, you know, you gotta switch from uncovered to covered ’cause the market’s gonna turn, so then put all that pressure on the advisor, um, I think is, is, is quite a big challenge, especially ’cause, again, the- here’s so many different needs that they’re trying to solve for their client. They just say, “Okay. I, I gotta sell one product, gotta buy this other product.” That’s a, that’s a big tactical call, uh, that no one wants to make ’cause if you’re wrong, it, it doesn’t look good.[00:40:20] Pierre Daillie: Great. [00:40:20] Ben Gossack: What we were… you know, this project, this, these products, you know, basically what we were saying is because we’re gonna do the active element on the call strategy and we were focused on total return, you know, our premise is that we’re gonna be in a benchmark, um, and that, you know, we can outperform in a fast rising market. Um, and so, you know, we can look at the history. You know, so TGED, the global, uh, ETF, you know, that was the one we incepted, uh, in, you know, spring 2019. We were already… the market was already on a run and [crosstalk 00:40:56] dealing with, uh… you know, we forget now. We had, uh, a US-China trade wars, um, but we added value, you know, through that [crosstalk 00:41:01] time.
Uh, and then we added value when the market plunged during COVID. Um, what I’m probably really proud of is that, um, that rip, we can… and we can… I think we can call it a rip from March [crosstalk 00:41:14] third, even to present day, and we’re talking like 45 degree angle, we continued to add value. And what we noticed is that some of these newer, uh, strategies that, you know, that employ an active element or the system that could not keep up because, again, we don’t know exactly their methodologies when they say active. It time… I just assume because of their distribution yields, they have to… you know, they don’t give themselves much upside, or it is really challenging to say I won’t read that call. You know, again, you gotta make that decision. You know, that… I think for us, that separate us from the past.[00:41:49] Pierre Daillie: Yeah. [00:41:50] Ben Gossack: And that unknown unknown that I think everyone should know now is you can write covered calls and you can outperform the market. Um, and you don’t need this pressure of I’m gonna be uncovered now because I know exactly that the market’s gonna go up. Oh, I’m gonna cover now ’cause I know the market’s going sideways or down. Um, the last thing, you know, on, on, you know, what, again, what we saw, the speed at which the market peaked and the market plunged was around the same time that the systematic strategies rolled their cover calls. [00:42:24] Pierre Daillie: Right. [00:42:25] Ben Gossack: And so that, you know, that premise that these strategies outperform in the down market and this specific situation with COVID didn’t apply. So, uh, you know, Feb 19th was the market peak. [00:42:37] Pierre Daillie: Yeah. [00:42:37] Ben Gossack: That’s roughly around the third Friday of the month when all these strategies roll over again. Everyone knows this. Um, the VIX, so let’s say that’s our measure for implied volatility, which is gonna drive the, the… things that you get from, from writing these calls was, you know, I’d say, sub 20. [00:42:55] Pierre Daillie: Right. [00:42:56] Ben Gossack: And it’s peak, it was like 30 or 90. So we’re talking about, you know, a major, you know, spike in, in volatility, which means a major spike in premiums. [00:43:05] Pierre Daillie: Yeah. That was the beginning of March. [00:43:07] Ben Gossack: So yeah. So Feb 19. [00:43:08] Pierre Daillie: Beginning of March, 2020. [00:43:09] Ben Gossack: Right. That’s when we have the spike. And then, um, you know, the bottom of the market’s March 23rd, which again would [crosstalk 00:43:16] roughly coincide with that third Friday. You know, for us, um, you know, it, it was obviously, you know, traumatizing one from just a, you know, personal safety and, and, and friends and family. Uh, and then, you know, the other challenging part was, you know, the stocks that we owned. I mean, all of a sudden, you know, doors are closing. You’re wondering if, you know, any of the businesses you own survive. I would say from an option premium perspective, it was Christmas every day ’cause we, we were able to constantly reprice our options. [00:43:47] Pierre Daillie: Yeah. [00:43:47] Ben Gossack: Um, so, you know, we might have sold it for 50 cents. It’s worth a penny ’cause the stock falls, we buy it back, and we write it again. Um, stuff that, you know, when it might have been two weeks out or three weeks out, we brought it in. So we’re constantly repricing as much as we can to go up the curve and down the curve. Um, and, again, if you followed a systematic strategy, you’re kind of were locked in. [00:44:09] Pierre Daillie: Right. [00:44:10] Ben Gossack: And then you, you know, once you started to say, okay, I’m gonna catch up, that’s when the market pivot. And if you’re putting in your 2%, um, you know, upside, that doesn’t work from March 23rd to today. You know, the, the market just kept growing and you would’ve just kept getting stocked out and yet you’d have to keep buying back, you know, at probably higher prices. [00:44:33] Pierre Daillie: It’s very interesting just to again, delineate between the fact that, that a systematic approach wouldn’t be able to make those, those daily decisions. You know, a lot of, a lot of algorithms were delayed because they were, they were waiting for the turn of a signal. Like a lot of the things we’ve talked about today are due to the biases that people have about so many different moving parts in the market and, and, and a lot of those biases are preventing them from investigating new ideas and, and taking, you know, a deep dive into something like this. Like what we’re talking about today, that’s, that’s really profound and it’s, you know, in, in its effectiveness. So let’s recap what we’ve talked about. You’ve got the dividend sleeves, right? [00:45:21] Ben Gossack: And, and still I’m gonna push back here and be like, [crosstalk 00:45:24] there’s no sleeves, right? Like we, we look at it holistically. [00:45:28] Pierre Daillie: Okay, good. [00:45:28] Ben Gossack: So, so we got, got… you know, we got the, the… we’ll call it the core of the portfolio. So that’s our, [crosstalk 00:45:33] our, our dividend growers and, you know, our, our… we’ll call it the non-dividend payers, but we’ll call it secular growers and that, that’s one layer that we… uh, again, if we think about it as a cake, you know, that’s one layer that we, we put together. And, you know, we’re trying to seek out a market level of, of dividend yield. Uh, and, and that, that would be the, the base layer. And then on top of that, then we, we, we would apply the, the call overlay. And that’s, that’s just, you know, trying to bring in the income, you know. [00:46:05] Pierre Daillie: Yeah. [00:46:06] Ben Gossack: But I like to look at it, you know, we… if we likened it to real estate, I have a bunch of great buildings or, or multi units, and now we wanna collect re- rent from them. Uh, and that’s how I look at the call premiums. I mean, I’m trying to collect rent from all these assets that I own. Um, and you know, again, one of the unlocks that we found was you could have a company that pays your dividend and we could write, you know, a call on it and the net yield, you know, we might achieve that even better by writing a call on Amazon and giving ourselves 8% upside for the week, um, or 8% upside for two weeks. Uh, and that’s, you know… or, or the, the, you know, a similar [inaudible 00:46:47] Square, you know, might yield better in the note phoning JP Morgan, and then even layering another call on top of it.
Uh, and so we look at the calls, uh, and that’s another, you know, sleeve of income. And then, you know, then we’ll look at our, our puts and we’ll think about how much cash we wanna hold. And, you know, being an active manager and, and I have a, a, a team of, of, of analysts, you know, we know what stocks we wanna add and, or, or either add to the portfolio or increase the weights in our portfolio, and that’s where the put contracts are on. And, um, you know, I’m happily… I’ve done the work and my team’s done the work and we’re happily to take assets off people’s hands.
You know, so it might be 5% out of the money. It might be 10% and so we’re talking about below the market price. And [crosstalk 00:47:39] again, people are giving us these yields. And I think, again, long term would be mid-teens. In this environment, it’s, it’s even juicier, um, so we’re seeing multiples of those yields. And then, holistically, all that together, you know, we think that’s about 4% yield and TGED about a three plus percent yield in TBD.
And to go back to what we said about the original, you know, the, the problem statement that we’re focusing on is obviously people’s yields have collapsed, um, and they either need to double their assets overnight or they need to move up a risk curve. Um, with our strategies, I mean, people are gonna recognize the stocks that we own, so it’s not like they’re moving up, uh, the risk curve, they’re owning quality franchises and secular growing areas. Um, and there’s a growth element in the sense that even though they’ve paid dividends, they’re still growth companies. And we have companies that, you know, they’re better off reinvesting in their business, uh, and growing themselves as well. So that solves, I think, the growth element and some of the income.
But again, um, dividend yield today is not enough. And that’s where, you know, we wanna enhance it. That’s the calls, uh, and the points. And, you know, four, 4% plus, I think puts you in a pretty comfortable range, um, for most investors. And, again, our style, because it’s growth income total return, doesn’t just apply to, you know, people in their 50s and 60s or 70s. I think it applies for a, you know, wide range of people, you know, even-[00:49:13] Pierre Daillie: Yes, [crosstalk 00:49:14] more universal. [00:49:14] Ben Gossack: Exactly. [00:49:15] Pierre Daillie: Yeah. [00:49:16] Ben Gossack: You know, that… so and it’s trying to… it’s solving a lot of things and, you know, and trying to do it in elegant way, but in sort of one product. [00:49:23] Trevor Cummings: We’re upping the sophistication of global equities. You, you, you know, this isn’t, this isn’t something that I would suggest investors do on their own. You know, if, if, if you were to employ a covered call writing strategy as an individual tax filer in Canada, you know, the CRA may have something to say about that and all of a sudden it’s, it’s income, right? [00:49:44] Pierre Daillie: Yeah. [00:49:45] Trevor Cummings: Advisors, you know, your most precious commodity is time. You know, it’s client facing time, really. And so it is possible that an advisor could employ something like this herself or himself, but this is, this is… you know, I’m biased for saying so, but this is something we pretty firmly believe you should delegate to a provider, to a manufacturer like TD Asset Management because every [crosstalk 00:50:11] contract you write is, you know, one less client interaction, so to speak.
You know, here, here in Ontario, dealing with advisors and portfolio managers for, you know, a decade and a half, I can count on one hand the number of investment professionals who, who do this as part of their value proposition because it’s just so labor intensive. There’s something really, really elegantly simple about giving that responsibility to, to us via the ETFs we have on offer.[00:50:40] Pierre Daillie: Yeah. And on top of that, it’s in the ETF wrapper. So 70% dividend stocks, 30%, non-dividend, we’re up to 30%. [00:50:52] Ben Gossack: Yeah. [crosstalk 00:50:52] Up to 30. I’ll say, you know, we’re probably about half out, probably around 15%. [00:50:56] Pierre Daillie: Okay. [00:50:57] Ben Gossack: But again, that, it’s not that that’s prescriptive, it’s, it’s just, we have the ability… again, everything goes back- [00:51:04] Pierre Daillie: Yeah. You, you, you have, you have cash as well, right? [00:51:06] Ben Gossack: Right. [00:51:06] Pierre Daillie: That’s right. [00:51:07] Ben Gossack: You know, just everything that we found is the more, again, the more restrictive, the more rules, the more you hold yourself back. And, and most people are like, kind of want more rules, like… but in terms of total return performance, the, the less… you know, the more, uh, ability that I can, you know, buy the, you know, the companies that we wanna buy into, again, not be stuck that it has to have a dividend or, or not a dividend or a targeted yield- [00:51:32] Pierre Daillie: Right. [00:51:32] Ben Gossack: … um, or, you know, okay, fine. Let’s make it only 10 % non-dividend payers, so we’ll give you a little, but, you know, we wanna still say its income. And we said, “We can generate synthetic yields better than dividend payer. So, I mean, why stop ourselves?” Now, again, it’s an income product, so, you know, we, we say 70/30, but I have that ability that, again, depending on the market, you know, to take it up there or to [crosstalk 00:51:56] [inaudible 00:51:56] okay, I don’t have to own a dividend payer. Uh, it just… again, it’s that, that, that flexibility allows us to, you know, get the creative juices going. And, and, again, ma- we’re Maximalist too. Just not maximizing yield, we’re maximizing the total return. [00:52:12] Pierre Daillie: All three. [00:52:13] Trevor Cummings: Think of the flip side too [crosstalk 00:52:14], right? If, if, if there’s a dividend paying company that suspends their dividend as part of our portfolio, then Ben and team have a decision to make. It, it’s not automatically going to be forced out if a company chooses to suspend a dividend due to COVID as opposed to fundamentals. You know, we’re not forced to exercise ourselves of that business, right? And, uh, to Ben’s point, we, we can continue to make our own dividend, so to speak, if you will, on, on the call side of it. [00:52:46] Pierre Daillie: So that… I mean, that was a big factor. That… I, I don’t know how big of a factor that was, but, uh, for you, but I’m, I’m guessing it was given that, that during COVID dividends were cut. How did, how did that affect your strategy? [00:52:59] Ben Gossack: So, um, I’d say, again, for people that depended on, on dividends, you know, that was quite shocking. [00:53:06] Pierre Daillie: Yeah. [00:53:06] Ben Gossack: And, I mean, in some cases you can’t blame the company, um, you know, when they’re laying off their employees, you know, when the business is, you know, ceasing because we affectively had to shut it down. Uh, you own a viable business and so in some cases, you know, you would understand it. There are many companies that we own that sustain their dividend, even grew their dividend last year [crosstalk 00:53:29] in, you know, probably, you know, the worst environment of our careers. So it not to say that, you know, all companies… you know, some companies were severely impacted. Some companies, you know, were still able to write it through, and a lot of it, um, is because we focus on the, on balance sheets.
Um, but I’d say for the average investor, that, you know, that’s a challenge if you were dependent. Even companies like AT&T, you know, kind of cut their dividend as well. I mean, a lot of people depend on, on that, that yield that comes from that, that telco. I’d say the, the one thing that really… and so going back to the, the original question, and, again, that’s where the calls can come in. And I, I remember I said it was almost like Christmas Day. Again, [crosstalk 00:54:10] the implied volatility, so the uncertainty of the path of where that stock could travel on a week or on, on a two week or a three week basis was so unknown ’cause none of us had ever experienced this before. Um, that’s, that’s what, like, really fueled those premiums.
Uh, and so we more than made up, um, for, you know, our dividend income, you know, compressing, uh, on the call side. Um, you know, I’ve… you know, then I’ll probably never… hopefully, I’ll never see that again in my career, but from, yeah, the, the harvesting yield perspective, you know, when we, you know, amazing moments I never experienced so-[00:54:47] Pierre Daillie: But, but if you weren’t, if you weren’t running this combined strategy, you wouldn’t have been able to do that. [00:54:52] Ben Gossack: Exactly. [crosstalk 00:54:53] So there, [crosstalk 00:54:54] there are many… you know, I think it’s like the aristocrats where they have to have, you know, 25 years of dividend growth. You know, that’s amazing if you can find a company that can do that. Um, they miss, you know, one dividend payment and they might be booted, you know, three years or five years. I think the rules have been massaged over time in order to let people back in. Um, the one thing I’d say that, um, is, is, you know, completely different and something, uh, we never sort of faced before was, you know, it’s, it’s a healthcare crisis, it’s a social crisis. Um, there were companies, again, we had done our research, they had ample balance sheet, um, that still cut their dividend, uh, because of social pressures. Um, again, because of COVID, they didn’t wanna be, you know, seen on the front page of newspapers, enriching shareholders with either five acts or dividends, and so they even cut it.
So for us, I’d say from me and, and my team, you know, that was a big surprise in the sense that, you know, we pride ourselves on, you know, getting outta companies that, you know, might, we think might cut their dividend. And here, you know, we did our homework and this new element about, you know, social pressures, um, forced them to cut their dividend or suspend it. Now, coming out of the crisis, many companies are in, in great shape and they’re generating, um, you know, free cash flow. You, the, um, I think the notional levels of free cash flow that we hadn’t seen before because in many ways, you know, COVID caused them to become more efficient and we’ve seen margin expanding.
It’s a bit bifurcated. Some companies have been able to bring back their dividends, um, and not f- face any sort of newspaper headline pressure [crosstalk 00:56:41] and we’ve seen that, you know, 5% increase, a 10% increase. And there are some elements, there are some companies that might be more in the eye of, of, let’s say, the general person that if they were to Institute, uh, a dividend, uh, or increase their dividend or do big buyback. So, um, let’s say the major pharmaceutical companies that are, uh, supplying, uh, uh, the vaccine are, you know, generating a lot of cash flow and free cash flow. They are not a able to return any of that to shareholders, uh, ’cause you better believe that that would be on the front page that, you know, they’re enriching themselves on this healthcare crisis.
Um, some companies, it’s that they’ve been given a pass, uh, and other companies, I think, have been held back or holding themselves back, um, maybe, maybe into 2022, um, so that they won’t get this sorta headline, uh, front page that, you know, the, the shareholders are being rewarded while either employees or their clients, uh, you know, are still being impacted [crosstalk 00:57:44] by the virus.[00:57:45] Pierre Daillie: Wow. I, I, you know, that… sorry, that was an angle that, that, uh… you know, those are some of the unintended consequences of ESG, right? Trevor, you, you, you said there, there are advisors who do this themselves, who try to do things like buy-write themselves and, and it’s not very efficient from a tax point of view. Within the ETF wrapper, it’s very efficient, number one. And number two, option writing income, the option yield is also traded as capital gain. [00:58:13] Trevor Cummings: Yeah, that’s correct. [00:58:14] Pierre Daillie: Right? [crosstalk 00:58:15] It’s not… it’s very tax efficient income. [00:58:18] Trevor Cummings: It’s… yeah, it’s a little on the weeds, but, you know, think of sort of two layers of tax with regards to the ETFs is what you do as the investor. You know, did you buy it here and sell it there? And then there’s what we do as, as the ETF provider, right? So if, if we have turnover in the portfolio, yes, there could be capital gains, of course. And, and, you know, you would pay taxes in the year that was realized and then you’d add that to your ACP, right? So, so with regards to call writing, that is, um, on the capital side of the account, so that would be distributed to investors as, as capital gains when, when the year is up.
Uh, put writing’s a little different. So put writing is on the income account. Um, so if we write a put where we don’t own the security, uh, but we’re writing a, you know, cash secured put, that could end up being income to an investor.[00:59:14] Pierre Daillie: Right. [00:59:15] Trevor Cummings: But, you know, then I would say we call that all, um, all ETF companies, TM included. We get to choose where we take our fees from. So our management fee, we will always take our management fee from the most taxed inefficient portion of the income, right? So, so if we have a chance to, we will take it out of foreign income or put income and we’ll leave the eligible dividends, if any, or the capital gains distributions for the investors that year end. So we’re trying to make this ETF as tax efficient as possible. In addition to delivering, you know, a, a good outcome, a gross of, of taxes, net of taxes, we want this to be really efficient and really of, of benefit to investors as well, for sure. [01:00:06] Pierre Daillie: Yeah. Thanks for clarifying that Trevor. That’s, that’s nifty. When you come back the dividend income and the growth and the option income, um, that, that makes for a very nice total return, total income. [01:00:18] Trevor Cummings: Yeah. Don’t, don’t take our word for it, right? But, but I, I, I happen to think it’s a killer app, you know. [01:00:24] Pierre Daillie: Yeah. [01:00:24] Trevor Cummings: The thing about backtest is I’ve, I’ve never met a backtest that in love as, as the saying goes, right? So we don’t have a backtest, but we have all 30 months of history. We have live data at this point and this is an ETF whose assets have doubled, uh, year to date. So, you know, there’s more interest, we’re gaining more traction, uh, and I think at the very least, we’d want people to put us on the short list or on the watch list, uh, but let’s have a conversation as well. Really, let’s take it off the, the, the podcast today and, uh, get to the finer points of, you know, whether or not this would be a fit inside of an advisor’s model or portfolio. [01:01:02] Pierre Daillie: Thank you very much, gentlemen. That was, that was, uh, very, very interesting. I think, um, you know, it’s, it’s something that, that investors and advisors, like, should be looking at more closely. How can advisors find you Trevor? [01:01:15] Trevor Cummings: So, like, for the purposes of the audience today, I’m, I’m one of three ETF specialists in Canada here at TD Asset Management. So there’s one at West, colleague of mine, Greg Croezen, uh, there’s Jonathan Needham who covers, uh, Eastern Canada and has some, uh, national office, uh, national accounts responsibilities. And we all interface with advisors in sort of the iRock space via our broker dealer team.
So if you’re familiar with who your TDAM wholesaler and insider are on the fun side, uh, we interface, we partner with them. So, so, you know, we float around [crosstalk 01:01:56] a little bit is, is, is the fun part, but, uh, the main way you can have an ETF discussion with us is via your TDAM sales team that you might already be using for our mutual funds, for example. And then, you know, we can have both conversations, which is great.[01:02:13] Pierre Daillie: So any, any final takeaways from, from both of you? [01:02:18] Ben Gossack: I, I, I’d say from my perspective here, you know, I, I appreciate the, the platform and interest. You know, I, I, I wish, you know, our strategy had that, you know, one line, you know, this is, you know, this is… you, you have this problem, this is the answer. Um, you know, I, I think, you know, we’ve had quite a lengthy discussion. There’s, there’s many layers and there’s all sophistication that we’re trying to do one product. Um, so, and I appreciate the opportunity.
Again, we’re trying to solve, not just an income problem, but a growth problem because of how low yields are. Um, and we think, you know, our two ETFs, TGED and TUED, you know, solve many problems for the advisor and for their clients in order to, you know, meet those needs without having to, you know, go and, and do something challenging from a, you know, risk perspective.
And so, um, again, it’s quality franchises and secular growing industries. And, uh, it’s about, uh, dividends and calls [inaudible 01:03:19] and put premiums, but in a way that the industry never sort of, you know, thought of because, you know, we like to think about things and sort of rules and buckets. So, um, so I, I encourage people get, get our discussion, you know, pick their interests to, to reach out, and, and we’re happy to you know, again, uh, walk you through exactly what we’re trying to do.[01:03:41] Pierre Daillie: Trevor? [01:03:42] Ben Gossack: Yeah. Pretty, pretty much the same thing. You, you know, I, I think it would be, I’d be remiss if I didn’t say that, that TD has, uh, let’s say, afforded our competitors a head start. You know, they’re some ETFs companies that have been around for 10 years, for 20 years, and we’re a little newer than, you know, maybe some of the more established players. But to that end, it means we must innovate. We must try harder to borrow from dividends, right? So I think a common thread to our passive ETFs, our quad ETFs, our sector ETFs, our active ETFs, is that, is the innovation that has taken place. Either we look at the landscape, we try to evaluate what the pros and cons are really of some of the legacy products that are out there, and we’re really trying to build better ETFs for our advisor clients, for their investors alike.
And I think, you know, in this business, uh, dollars are votes, right? We, we have the votes of confidence. We have this really incredible asset gathering momentum behind us, which, you know, knock, knock on wood tells us we’re doing something right. So we’re gonna continue to launch product that we think is timely, that innovates the space, that tries to improve on that, which is, which is already out there. And with regards to active, you know, to borrow the Gretzky phrase, we’re skating where the puck will be.
You know, if, if you look at the ETF industry, the fastest growing segment is the active ETF, and TGED and TUED are really the flagships on offer for, for the active side. So, you know, I appreciate the time to talk to it, to appear. Ben, good to see you again and, uh, you know, let’s do it again soon.[01:05:25] Pierre Daillie: Thank you. And, uh, so one last question for both of you. Would you rather be the worst player on the best team or the best player on the worst team? [01:05:41] Ben Gossack: Um, I, I, I’m, uh, I’m quite a, a, a basketball fanatic. Uh, I think it depends on [laughs] your, your career. I think we’ve seen with, uh, certain, uh, basketball players, you know, via Damian Lillard or Steph Curry, uh, being the best player on maybe not the best, um, college team gets you in the pros. [01:06:03] Pierre Daillie: Mm-hmm [affirmative]. [01:06:04] Ben Gossack: Um, but what we’ve all seen from the last dances, being the worst player on the Chicago Bulls got you six ranks. Uh, so [laughs], I guess my answer is it depends. [01:06:16] Trevor Cummings: Yeah. You know, I don’t want to come out and say that I enjoy being the, the stupidest guy in the room, uh, but I kind of I, I do love being at a shop that has just such intellectual capital behind it. Uh, and so, you know, having the, the worst house in the best neighborhood or, you know, being the worst player on the best team, uh, it, it is to me really what it’s all about. You know, it’s, it’s the opportunity to learn and grow from peers. You don’t get that if you’re the best player on the worst team or something like that. So I’m, I’m gonna, I’m gonna go with Ben on that one. [01:06:53] Pierre Daillie: Awesome, guys. Thank you so much. It’s been, it’s been a real pleasure talking to you and, uh, it has been very enlightening. [01:06:59] Trevor Cummings: Thanks, Pierre. [01:07:00] Pierre Daillie: Thanks, Pierre.
In the conversation, Ben Gossack, lead portfolio manager on TDAM's enhanced dividend strategies, details how he and his team actively manage their core 'dividend-growers' stock selection strategy, which comprises at least 70% of holdings in their ETFs, while integrating a less constrained, 'unlocked' investment process that also involves layering in notional and direct holdings in non-dividend paying secular growth names, e.g. Amazon and Square, for up to a maximum of 30%.
Ben and Trevor further detail the mechanics of the unique feature of TDAM's enhanced dividend income strategy which is the addition of the important second and third layer of investment income generation, which involves two actively managed, proprietary option-yield generating overlays:
1) Writing covered calls against a percentage of the portfolio, effectively putting those shares up for short term 'rent', i.e. the option premium income, and 2) Cash-covered put-writing, the equivalent of 'selling insurance,' thus collecting option premium income, to get paid to buy stocks at lower prices.
Finally, Ben and Trevor disspell commonly held biases, heuristics and myths surrounding the use of actively managed enhanced option-writing strategies. Among those commonly regarded heuristics is the belief that covered option writing yield strategies are only effective in markets that are moving sideways or declining. Also diving into the differences between a systematic approach to option-writing vs. the advantages of being active.
To the point, about last year's sharp bullish upturn following the March 23, 2020 low, "from an option premium perspective, it was Christmas every day," said Gossack. In addition, he also points out that since they are active, they have the freedom to choose to write, or not write options, depending on market conditions.
TDAM's active enhanced dividend ETF offerings are available in two market exposures: Global (ticker: TGED), U.S. (ticker: TUED). For more on these, visit td.com/ETFs.
You can also get more intelligence on TDAM's enhanced dividend strategies here.
Trevor Cummings on Linkedin
Ben Gossack on Linkedin
Ben Gossack's TDAM Bio
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