Harnessing derivative income ETFs in client portfolios
Natixis Investment Managers has explored how financial advisers can leverage derivative income exchange-traded funds (ETFs) to enhance income generation.
According to the investment management firm, these financial instruments combine the benefits of traditional ETFs with the complexities of derivatives. As a result, they provide investors with a blend of income, market participation, and risk management.
“By employing options strategies, such as covered calls, derivative income ETFs aim to generate a steady income stream while providing exposure to underlying assets. This makes them particularly attractive in uncertain economic environments when traditional income sources may falter,” explained Tyler Williams, Natixis Investment Managers’ vice president of ETF capital markets and products in the US.
Derivative income ETFs utilise derivatives to generate a steady income stream for investors while also managing risk.
“Derivative income ETFs can collect premiums from selling options, which are then distributed to investors on a consistent basis. This approach not only enhances the yield of the ETF but also provides a steady income stream, making it particularly appealing to income-seeking investors.”
These ETFs provide a risk-reward profile that aims to benefit from market conditions while protecting against potential downsides, it said, representing a “powerful tool” for portfolio diversification and income enhancement.
Williams continued: “Investors, both retail and institutional, are particularly excited about the ability of these ETFs to provide enhanced yield, offer a diversified income stream and improve the risk profile of a portfolio.
“For conservative investors, they offer enhanced yield opportunities, while balanced portfolio holders appreciate the diversification of income sources outside traditional corporate and government bonds.”
Meanwhile, more aggressive investors can use derivative income ETFs to supplement growth and manage equity volatility, with the broader goal of meeting various portfolio objectives.
As financial markets continue evolving, Williams said he expects these investment vehicles to play an increasingly important role in helping investors navigate the complexities of modern investing and achieving their financial goals.
An example of these products is the Natixis Gateway Quality Income ETF, which is listed on the New York Stock Exchange for US investors. The fund employs a covered call overlay strategy on typically 50 per cent of the equity portfolio to generate consistent monthly income.
Looking at the underlying equity portfolio, the ETF invests in stable, high-quality US companies with strong fundamentals.
AUTHOR
Jasmine Siljic
Recommended for you
Infrastructure assets are well-positioned to hedge against global uncertainty and can enhance the diversification of traditional portfolios with their evergreen characteristics, an investment chief believes.
Volatility in US markets means currency is becoming a critical decision factor in Australian investors’ ETF selection this year.
Clime Investment Management is overhauling the selection process for its APLs, with managing director Michael Baragwanath describing the threat of a product failure affecting clients as “pure nightmare fuel”.
Global X will expand its ETF range of exchange-traded funds next month with a low-cost Australian equity product as it chases ambitions of becoming a top issuer of ETFs in Australia.
