High Yield
I personally don't think NAV erosion and high yield are inherently bad in isolation. If ZEQT-T simply changed its distribution policy from roughly 6% to 20% annually, that alone wouldn't change its total return. You'd receive more of your investment back as cash and have correspondingly less remaining in the NAV.
Obviously, there can be tax implications and other practical differences, particularly in a non-registered account. But for the sake of isolating the concepts, let's ignore those details here.
The distribution rate shouldn't be confused with the return-generating capability of the investment.
I think what's often missing from these debates is some baseline expectation for what constitutes a decent long-term total return. If you think something like 7–12% annualized is already pretty good, then a 30% yielder can't simply turn that into a 30% return.
And again, that's the key assumption here. I'm assuming that even newer or more sophisticated strategies generally aren't going to sustainably generate something like 20–30% annualized total returns over the long term.
I'm not saying 12% is some mathematical ceiling. If you believe a particular strategy can sustainably generate substantially higher returns, then obviously you'll reach a different conclusion. But at that point, the argument should really be about why you expect those higher total returns.
Maybe the active manager adds alpha. Maybe the underlying exposure massively outperforms during your holding period. Maybe leverage increases expected returns. Etc.
Otherwise, over a long enough period, something has to give. If a fund distributes substantially more than the total return it generates, the NAV can decline, the distribution can eventually be cut, or some combination of the two.
Again, I don't think that makes the fund inherently bad. It's just important to understand what the distribution does and doesn't represent.
That's also why my retirement calculators require an estimate of total return. A common response is, "Well, obviously I knew that." Fair enough. But I think this starts to challenge one of the common value propositions of high-yield and covered-call strategies, which is that they're somehow easier.
People constantly say selling shares is difficult or psychologically uncomfortable. That's subjective.
If your portfolio can sustainably support you spending 4%, but your fund distributes 20%, the spending decision hasn't disappeared. You now have to decide how much of that 20% you can actually spend and how much needs to be reinvested.
The high distribution has replaced one decision with another.
Whether someone finds selling the appropriate number of shares harder than receiving a large distribution and reinvesting the appropriate amount is ultimately a behavioural preference. I don't think one is inherently simpler.
SIXY is also an interesting example. It's a very new product, so I've seen the idea that we need to wait and see what happens with it. We obviously need time if the question is how well SIXY itself will perform.
But we don't need ten years of SIXY returns to understand the arithmetic of a high distribution rate.
It looks to me like the type of product you'd expect to see created when retail investors are enthusiastic about Canadian banks and high distributions. Maybe it performs extremely well. Maybe it doesn't. That part is genuinely unknown.
But if its distribution remains meaningfully higher than the total return it ultimately generates, the difference still has to show up somewhere. Time doesn't change that relationship.
TL;DR: The yield itself isn't really the concern. The concern is the behavioural mistakes average investors can make by interpreting distribution yield as return or spendable income, while often paying higher fees than they would for something more vanilla.
An investor who understands exactly what the product is doing, understands the trade-offs, and either prefers the structure or genuinely believes the strategy can generate higher total returns can reasonably choose to buy it. I'll never have an issue with someone knowingly choosing what they prefer or making a different bet on expected returns.
