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The past year was tough for many parts of the stock market, with the notable exception of a handful of high-profile technology stocks. The sector largely pulled the S&P 500 upward in 2023 while most other stocks struggled amid the higher interest rate environment. So, what’s in store for tech stocks in 2024?
For advisors and investors considering this sector, tech’s prospects for 2024 remain strong, says James Learmonth, senior portfolio manager with Harvest Portfolios Group Inc. in Oakville, Ont. “Big tech had a fantastic year in 2023 and that’s likely to continue. The same size of gains in 2024 is less likely, but even so, there remains a lot of excitement around emerging technologies.”
Innovations in artificial intelligence (AI) have been one of the factors driving the prices of the “Magnificent Seven” stocks: Microsoft Corp. MSFT-Q, Alphabet Inc. GOOGL-Q, Apple Inc. AAPL-Q, Tesla Inc. TSLA-Q, Amazon.com Inc. AMZN-Q, NVIDIA Corp. NVDA-Q and Meta Platforms Inc. META-Q.
“Many analysts are talking about AI’s next phase that could start this year and next,” Mr. Learmonth says.
He notes the growth of non-cloud-based AI tools that will soon be offered on the next generation of tablets, mobile phones and other devices.
There are some questions about whether investor appetite for AI and other technology-driven trends will diminish if the economy stumbles, or inflation and interest rates run higher for longer than expected. Yet, the short-term outlook is beside the point for technology-focused investors given the sector’s long-term growth trajectory, Mr. Learmonth says.
One challenge is how to get risk-adjusted exposure to technology stocks, which don’t generate much dividend income, if any. Employing a covered-call strategy for a portion of a technology allocation in the portfolio is one solution.
“Even though these companies offer higher long-term growth, using covered calls to generate additional cash flows can make a lot of sense for advisors and their clients,” Mr. Learmonth says.
Writing covered calls on tech stocks generates steady income from the premiums. Growth is limited should these stocks’ prices take off, surpassing their call option strike price. Still, veteran money managers have used covered-call strategies for decades.
More recently, the strategy has been democratized via a growing selection of covered-call exchange-traded funds (ETFs). Harvest is among the leaders in the space in Canada. The firm has a suite of 16 equity income ETFs, and a new suite of fixed-income ETFs (including a pair with U.S. Treasuries exposure with covered calls and a Canadian T-Bill ETF).
Two of Harvest’s equity income offerings focus on tech, including Harvest Tech Achievers Growth & Income ETF HTA-T. It has more than $500-million in assets under management and a track record of almost a decade.
Harvest Tech Achievers Growth & Income ETF’s portfolio consists of 20 equity positions, offering a mix of big tech, AI players such as NVIDIA, leading financial technology providers, such as Intuit Inc. INTU-Q, and top cybersecurity providers, including CrowdStrike Holdings Inc. CRWD-Q.
The portfolio consists of market leaders with strong, long-term growth prospects. It also generates steady income from premiums on the call options, written on up to 33 per cent of the value of each individual stock position.
“The overall strategy aims to generate steady cash flow for monthly distributions from covered-call premiums, while still retaining enough capital upside from owning growth-oriented technology stocks,” Mr. Learmonth says.
Even if these stocks are more volatile, he notes that this actually generates higher premiums for the call options.
The Harvest ETF is offered in three versions: currency hedged, non-hedged and in U.S. dollars. It has had an almost 15-per-cent annualized total return since its inception, while providing an annual yield of more than 8 per cent as at Dec. 31, 2023
Notably for income investors, the ETF pays a 12-cent monthly distribution per unit, which has increased three times since 2019.
The companion Harvest Tech Achievers Enhanced Income ETF HTAE-T has a covered-call overlay. It uses moderate leverage to enhance monthly cash flow and growth prospects.
“This ETF really just holds HTA, but it employs 25-per-cent leverage to buy more of it,” Mr. Learmonth says. “The leverage will generate a bit more income from the options strategy and more upside from capital growth.”
Since its 2022 launch, Harvest Tech Achievers Enhanced Income ETF currently generates a 10.5 per cent annualized yield based on monthly distributions of 13 cents per unit, and an annualized return of more than 50 per cent (as at Dec. 31, 2023).
The leveraged strategy is not without risks. It can lead to steeper losses when the prices of the stocks it holds fall, Mr. Learmonth cautions.
Leverage aside, covered-call strategies are worth a closer look by advisors and do-it-yourself investors seeking a mix of income and growth, which can be hard to come by when investing in the tech sector.
“You might give up some upside for capital growth, but in exchange you’re getting regular cash flow every month,” Mr. Learmonth says.
Advertising feature produced by Globe Content Studio with Harvest Portfolios Group. The Globe’s editorial department was not involved.