Japjeet Singh, editor of Finacify, breaks down his real Smith Manoeuvre strategy: borrowing against home equity at 5.5% to invest in high-yield covered call ETFs like HDIV, CNCC, and USCC.
This post describes my personal investing experience for educational purposes only. It is not financial advice, and nothing here is a recommendation to buy, sell, or hold any security. Borrowing to invest (leverage) can amplify losses as well as gains — you can lose more than you expect, including money you borrowed. Do your own research and consider speaking with a licensed professional before making any investment decisions.
A few years ago I did something most Canadians are conditioned to think is crazy: I deliberately took on more debt. Not to buy a car or a vacation, but to invest. The idea is deceptively simple — borrow money at a low rate, deploy it into assets generating a higher rate, and pocket the spread. Do it inside a tax-efficient structure, and you can also deduct the interest from your income.
In Canada, this strategy has a name: the Smith Manoeuvre. And I've been building my version of it, brick by brick, using covered call ETFs as the engine.
What the Smith Manoeuvre Actually Is
The Smith Manoeuvre is a Canadian strategy that converts non-deductible mortgage debt into tax-deductible investment debt. Here's the simplified version of how it works:
You have a mortgage. As you make payments, your principal goes down and your available HELOC (Home Equity Line of Credit) room goes up. Normally that room just sits there. With the Smith Manoeuvre, you redraw those payments as investment capital, invest in income-producing assets, and deduct the HELOC interest from your taxable income under Section 20(1)(c) of the Income Tax Act — the provision that allows interest deductibility when funds are used to earn investment income.
My current setup at a glance
Read this before the math. Everything below assumes borrowing costs stay low, distributions stay high, and my personal tax situation. If rates rise, distributions get cut, or the ETFs' net asset value erodes, the spread I'm describing shrinks or goes negative — while the debt remains. The detailed risks are covered further down; don't skip them.
That effective borrowing cost of 3.1% is the key number. When you can deduct 5.5% interest at a 43% marginal rate, your real cost drops dramatically. And that's before accounting for the fact that much of the income from covered call ETFs comes as return of capital — which defers tax further.
Why Covered Call ETFs?
The Smith Manoeuvre only works if your investments generate enough income to cover the interest and ideally accelerate mortgage paydown. Dividend ETFs yielding 3–4% don't cut it — you need higher distribution rates to make the spread meaningful.
Covered call ETFs are a specific category of fund where the manager holds a portfolio of stocks and simultaneously sells (writes) call options against those positions. The option premium collected gets distributed to unitholders, which is why yields are dramatically higher than vanilla equity ETFs.
The tradeoff: you cap your upside. When the underlying stocks surge, you don't fully participate because you've sold that upside as option premium. So these aren't wealth-building tools in the traditional sense — they're income machines. For the Smith Manoeuvre, that's exactly what I need.
"I don't need the ETF to go up dramatically. I need it to generate reliable income month after month to pay down my mortgage and redraw capital. The covered call structure is built for that job."
The ETFs I Actually Researched
I spent serious time digging into the Canadian covered call ETF landscape. Here are the ones I analyzed most closely, along with what I found.
Canadian-Listed Options
One thing I kept running into during my research: published yield numbers are often based on trailing distributions, which can be inflated by return of capital (ROC). ROC isn't "real" income — it's just giving you your own money back. For the Smith Manoeuvre, this actually has a silver lining: ROC isn't immediately taxable, which defers the tax hit. But it also means your adjusted cost base (ACB) is eroding, creating a capital gain down the road when you sell.
HDIV vs USCC — A Head-to-Head I Spent Hours On
Two ETFs kept coming up as candidates for my core HELOC allocation: HDIV and USCC. On the surface both yield in the double digits, but the mechanics underneath are quite different.
| Feature | HDIV | USCC |
|---|---|---|
| Structure | Fund of Hamilton ETFs + 25% leverage | Direct US large-cap CC portfolio |
| Approx. Yield | ~14–16% | ~15–18% |
| MER (all-in) | ~0.89% blended | ~0.65% |
| Currency risk | CAD-denominated | CAD-hedged (hedge cost applies) |
| Leverage | Built-in 25% | None |
| Best for Smith Manoeuvre | If you want diversified CC exposure via one ticker | If you want pure US exposure + slightly higher yield |
The HDIV fund-of-funds structure means you're paying MER at the wrapper level and at the underlying ETF level — I calculated the blended all-in cost at roughly 0.89%. That's not dealbreaking, but it's worth knowing. USCC is cleaner in terms of structure but brings USD/CAD hedge friction.
My current thinking: CNCC as a core position, with USCC adding US-market exposure, and HDIV as a diversification option if I want single-ticket breadth across sectors.
The Math — Does the Spread Actually Work?
Let me run through a simplified scenario based on my actual parameters.
Hypothetical: $50,000 HELOC Deployment
That's before reinvestment compounding and before using the distributions to accelerate mortgage paydown — which frees up more HELOC room to deploy further. The machine is designed to grow itself.
What About Telus? And Other Individual Stocks?
I also looked at whether individual stocks could serve the income role better than ETFs in some cases. Telus came up as a compelling option — a Canadian telecom with a dividend yield around 9.5% at certain entry points and a strong history of annual dividend growth. Compared to Rogers, Telus has historically been preferred for income strategies because of the more consistent dividend track record.
That said, single-stock risk is real. A HELOC-funded position in one telecom stock is a concentrated bet. I treat individual dividend stocks as potential satellites around a core ETF position, not replacements for it.
A Note on the Bank of Canada and Rate Risk
The whole strategy rests on the cost of borrowing staying manageable. The Bank of Canada rate outlook for 2026 has rates settling around the 2.25–2.5% range as the base case, which translates into a prime rate around 4.45–4.95% depending on the institution. My HELOC is prime + 0.5%, so I'm currently at 5.5%.
If the BoC were to surprise with rate hikes, my interest cost goes up while my distribution income is relatively fixed. This is the core rate risk of leveraged investing strategies, and it's why I'm not putting my entire HELOC capacity to work at once. I'm deploying gradually, keeping a buffer.
Risks I'm managing
- NAV erosion: Covered call ETFs can see their net asset value decline over time if the underlying stocks underperform. High yield doesn't compensate for a shrinking principal.
- Rate risk: A sharp increase in prime rate compresses the spread, potentially to zero or negative.
- Return of capital complexity: ROC defers tax but erodes ACB — requires careful tracking at tax time.
- Leverage amplification: HELOC-funded investing amplifies both gains and losses. A 20% ETF drawdown on borrowed money hurts more than on owned capital.
- Deductibility eligibility: Interest is only deductible if the investment has a reasonable expectation of income. Pure capital-gain plays (e.g., gold ETFs) may not qualify under s.20(1)(c).
Where This is Heading
The model I'm running sends CNCL or CNCC distributions directly to my mortgage, which lowers the principal, which I then redraw as fresh HELOC capital to reinvest. Over time, the goal is to have a meaningful income-producing portfolio funded entirely by home equity — with the interest deduction converting what was a non-deductible mortgage into a tax-advantaged investment loan.
It takes patience and discipline. The compounding is slow at first and faster later. What I've found most useful is building a proper model of the numbers — tracking distributions, ACB changes, interest costs, and the mortgage paydown trajectory together — rather than just looking at yield in isolation.
That's actually part of why I built Finacify. Most personal finance tools tell you your net worth snapshot. I wanted something that modelled the trajectory — what does my financial picture look like in 5, 10, 20 years if I execute this strategy? The retirement planner and portfolio assessment tools we're building are designed exactly for that kind of forward-looking analysis.
"The goal isn't a high yield number on a screen. The goal is a steadily shrinking mortgage and a steadily growing investment portfolio — running in parallel, funded by the same asset."
Final Thoughts
The borrow-low, invest-high strategy isn't for everyone. It requires a stable income, a firm grasp of the tax mechanics, and the emotional fortitude to not panic when your ETF drops 10% while your HELOC interest keeps ticking. But for Canadians who have built equity and want to put it to work — not just sit on it — the Smith Manoeuvre is one of the most tax-efficient paths available.
I'll keep writing about the specific ETFs, the modelling, and the real numbers as the strategy evolves. And if you want to model scenarios like this for your own situation, that's what Finacify's planning tools are for — they show you the trajectory of a strategy, not whether you should run it.