Q: Good afternoon,
Just to follow up on an earlier question regarding HHL. I held this for ~ 2 years, mainly for income. I started to question relative underperformance several months ago, and then made a decision to exit. I did so not so much as a result of having a view on US healthcare, but more on the sustainability of the monthly dividend of $0.06. The yield is currently approaching ~ 11%, and I wonder if the YTD price action has more to do with general price decay as a result of not cutting the monthly dividend as a result of lower option premiums, and less to do with the individual stock holdings represented in the ETF.
Curious to know your views on this, and whether or not this is an inherent risk in an environment where option premiums can't always cover monthly distributions on their own for covered call ETFs. And at what point do the fund managers make a call to cut the monthly distribution to a more manageable level in order to avoid this price decay?
Thanks as always.
Just to follow up on an earlier question regarding HHL. I held this for ~ 2 years, mainly for income. I started to question relative underperformance several months ago, and then made a decision to exit. I did so not so much as a result of having a view on US healthcare, but more on the sustainability of the monthly dividend of $0.06. The yield is currently approaching ~ 11%, and I wonder if the YTD price action has more to do with general price decay as a result of not cutting the monthly dividend as a result of lower option premiums, and less to do with the individual stock holdings represented in the ETF.
Curious to know your views on this, and whether or not this is an inherent risk in an environment where option premiums can't always cover monthly distributions on their own for covered call ETFs. And at what point do the fund managers make a call to cut the monthly distribution to a more manageable level in order to avoid this price decay?
Thanks as always.
5i Research Answer:
Recent data on HHL show that 79% of the payment is taxed as return of capital. Certainly, if the fund is not earning its dividend then net asset value is going to decline with payments. Managers do try to keep distributions stable, but will cut (or raise) if conditions warrant. HHL raised its rate (slightly) in mid-2024. We would not really expect a cut here in the short term.