1. Usually high yield means higher risk, but I'm assuming because covered calls are being used to generate this income that this statement doesn't apply? Can you confirm explain?
2. How risky is this compared to an equity ETF? Higher or lower risk?
3. Is there any long term scenario where this would underperform cash?
4. Generally what would be a safe portfolio weight for this type of product?
1) The higher yield does come from call options, as the fund sells 'at the money' options on half of its portfolio. We would not consider the high yield as a reflection of risk, though the fund is certainly not risk-free. 2) There is still equity risk, and concentration (financials) risk. But vs a similar ETF that does not use options there is a bit less risk, as the call option income provides some degree of downside protection vs a fund that does not have this additional income. 3) Yes, underperformance is a possibility. The sector can decline and has had periods of big drawdowns. In the financial crisis of 2008 some bank stocks fell 50%, quickly. We would not consider the fund as a cash equivalent because of its 100% equity exposure. 4) Despite point #3, we would not consider it an overly risky product. In times of bank stock decline, the pain is usually short-lived. Banks have very strong dividend records, and the Canadian industry is less competitive than other countries. We would keep total financial sector exposure in mind (always), but for an income-focused investor we could see HMAX at 10%.