Hamilton Capital Partners Inc. and Hamilton Canadian Financials Yield Maximizer ETF
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from concentration restriction in subsection 2.1(1) of NI 81-102 to permit ETF to purchase securities of an issuer if after the purchase more than 10% of the ETF's net asset value would be invested in securities of an issuer -- ETF will invest in stock of top ten Canadian financial services companies, as determined by market capitalization, and invest in each issuer in proportion to its market-capitalization weight, such that immediately after a purchase, more than 10% of the ETF's net asset value may be invested in any one or more of the financial services companies -- ETF's portfolio will not be actively managed and will be rebalanced semi-annually -- Relief granted subject to specified prospectus disclosure.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.1(1) and 19.1.
January 9, 2023
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF HAMILTON CAPITAL PARTNERS INC. (the Filer) AND HAMILTON CANADIAN FINANCIALS YIELD MAXIMIZER ETF (HMAX OR THE ETF)
The principal regulator in Ontario has received an application from the Filer on behalf of the ETF for a decision under the securities legislation of Ontario (the Legislation) for exemptive relief (the Exemption Sought) relieving the ETF from subsection 2.1(1) of National Instrument 81-102 Investment Funds (NI 81-102) which prohibits a mutual fund from purchasing a security of an issuer, entering into a specified derivatives transaction or purchasing an index participation unit if, immediately after the transaction, more than 10% of the net asset value (NAV) would be invested in securities of any one issuer (the Concentration Restriction).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 -- Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Northwest Territories, Nunavut and Yukon (together with the Jurisdiction, the Jurisdictions).
Terms defined in National Instrument 14-101 -- Definitions, NI 81-102 or in MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein.
The decision is based on the following facts represented by the Filer:
1. The Filer is a corporation organized under the laws of Ontario with a head office in Toronto.
2. The Filer will be the trustee, portfolio manager and investment fund manager of the ETF.
3. The Filer is not in default of securities legislation in any of the Jurisdictions.
4. The Filer is registered as: (i) an investment fund manager in Ontario, Quebec and Newfoundland & Labrador; (ii) an exempt market dealer in Ontario; and (iii) a portfolio manager in Ontario.
5. The ETF will be an exchange traded mutual fund trust governed by the laws of Ontario and a reporting issuer under the laws of the Jurisdictions.
6. The Filer filed a preliminary long form prospectus on behalf of the ETF with the securities regulatory authority in each of the Jurisdictions on December 7, 2022. It is anticipated that a final prospectus (the Prospectus) will be filed on behalf of the ETF by no later than, on or about, January 13, 2023.
7. The ETF will be subject to NI 81-102, subject to any exemptions therefrom that may be granted by the securities regulatory authorities.
8. The ETF will be subject to National Instrument 81-107 Independent Review Committee for Investment Funds.
9. Units of the ETF will (subject to satisfying the TSX's original listing requirements) be listed on the TSX.
10. The investment objective of the ETF will be to deliver attractive monthly income, while providing exposure to a market cap-weighted portfolio of equity securities of Canadian financial services companies (each, a Financial Services Company, and collectively, the Financial Services Companies). To supplement dividend income earned on the equity holdings, mitigate risk and reduce volatility, HMAX will employ a covered call option writing program.
11. The proposed investment strategy of the ETF is to invest in stock of the top ten Financial Services Companies, as determined by market capitalization. As an alternative to, or in conjunction with investing in and holding the constituent securities, HMAX may also invest in other securities, including other investment funds, to obtain direct or indirect exposure to the same securities in a manner that is consistent with HMAX's investment objective. HMAX may also hold cash and cash equivalents or other money market instruments in order to meet its obligations.
12. Portfolio holdings will be selected based on their market capitalization and rebalanced semi-annually (an "HMAX Rebalance Date"). As such, both initially and on each HMAX Rebalance Date, the portfolio adviser will determine the top 10 Financial Services Companies listed on the TSX for which an active exchange-traded options market exists, by market capitalization, and will, directly or indirectly, invest in each issuer in proportion to its market-capitalization weight, such that immediately after a purchase, more than 10% of the ETF's NAV may be invested in any one or more of the Financial Services Companies. Rebalancing transactions will be effected as soon as is reasonably practicable following each HMAX Rebalance Date. Between HMAX Rebalance Dates, the allocation between each of the constituent securities will, directly or indirectly, change due to market movement and the portfolio adviser will not re-allocate, include or exclude issuers from HMAX's portfolio until the next HMAX Rebalance Date.
13. To mitigate downside risk and generate income, the portfolio adviser, in conjunction with the ETF's sub-advisor, will actively manage a covered call strategy that will generally write at or slightly out of the money call options, at its discretion, on up to 100% of the value of HMAX's portfolio. Notwithstanding the foregoing, HMAX may write covered call options on a lesser percentage of the portfolio, from time to time, at the discretion of the portfolio adviser.
14. Based on the investment strategy described herein, the Financial Services Companies that would be invested in by the ETF as of the date hereof are: Royal Bank of Canada, The Toronto-Dominion Bank, the Bank of Montreal, Brookfield Asset Management Inc., The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Manulife Financial Corp., Sun Life Financial Inc., Intact Financial Corp. and National Bank of Canada.
15. As of November 22, 2022, the market capitalizations of the Financial Services Companies range from $33.2 billion (National Bank of Canada) to $186.9 billion (Royal Bank of Canada), with well over $100 million of shares of each stock traded each day.
16. Based on the market capitalizations noted above and the ETF's proposed investment strategy to weight portfolio holdings based on market capitalization, the portfolio weightings of the Financial Services Companies would range from approximately 4.0% (National Bank of Canada) to approximately 22.5% (Royal Bank of Canada). Such weightings may change depending on the relative market capitalization on a particular HMAX Rebalance Date, however, as noted, the portfolio will not be actively managed and an investment in a Financial Services Company will be made in proportion to its market-capitalization weight.
17. In order to achieve its investment objective, and based on the proposed investment strategy, the ETF wishes to be able to exceed the Concentration Restriction so that it may invest more than 10% of its NAV in any one or more of the Financial Services Companies, in proportion to that issuer's market capitalization weight.
18. Absent the Exemption Sought, the ETF would not be permitted under the Concentration Restriction to purchase securities of one or more of the Financial Services Companies if, immediately after the transaction more than 10% of its NAV would be invested in securities of such issuer.
19. The investment objective and investment strategy of the ETF, as well as the risk factors associated therewith, including concentration risk, will be disclosed in the Prospectus of the ETF, as may be amended from time to time.
20. As soon as practicable following the end of each month, the portfolio adviser will publish on the ETF's designated website at www.hamiltonetfs.com the ETF's holdings in the Financial Services Companies expressed as a percentage of the NAV of the ETF.
21. The common shares of the Financial Services Companies are listed on the TSX and are among the largest public issuers in Canada.
22. If required to facilitate redemptions, distributions or pay expenses of the ETF, securities of each Financial Services Company will be sold pro-rata across the ETF's portfolio according to their relative market values at the time of such sale.
23. Future subscriptions for ETF securities, if any, will be used to acquire securities of each Financial Services Company up to the same weights as the Financial Services Company securities exist in the ETF's portfolio, based on their relative market values at the time of such subscription.
24. In the absence of: (i) new subscriptions for the ETF's units, (ii) sales or delivery of common shares of issuers that are held by the ETF to facilitate distributions, exchanges, redemptions or to pay the ETF's expenses, or (iii) corporate actions of the issuers held by the ETF or reinvestment of cash dividends, it is expected that the number of common shares of each issuer in the ETF's portfolio will generally not change, other than in the limited circumstances described above. The ETF's portfolio will not be actively managed by the Filer and as noted above is rebalanced on a semi-annual basis in order to establish the weightings noted.
25. The Exemption Sought will allow the ETF to pursue and achieve its investment objective in a cost-effective manner and will permit the ETF to implement its investment strategies.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:
(a) an investment in a Financial Services Company is made in accordance with the ETF's investment objectives and investment strategies as described in its Prospectus;
(b) the Prospectus discloses:
(i) in the investment strategies that:
(A) the ETF may invest more than 10% of its NAV in equity securities of any one or more of the Financial Services Companies, in proportion to that issuer's market-capitalization weight; and
(B) the ETF's portfolio will be rebalanced semi-annually in accordance with the rebalancing procedure described at paragraph 12 above;
(ii) the relief granted pursuant to this decision under the heading "Exemptions and Approvals"; and
(iii) a risk factor regarding the concentration of the ETF's portfolio in Financial Services Companies, and the risks associated therewith.