Investors can turn to powerful inflation-fighting exchange traded fund strategies to better adapt to the new normal.
In the recent webcast, Postcards from the Hedge: To Battle Inflation, Try These Unique Strategies, Kevin Simpson, founder and CIO of Capital Wealth Planning, LLC, warned that investors in need of current income are hard-pressed to find viable solutions. The low rates make it difficult to generate material income. The size of income is often prioritized over the growth of income, resulting in longer-term issues. Meanwhile, upside potential may be forfeited if investors are too dependent on bonds for their income.
Consequently, Simpson argued that investors should turn to a targeted strategy to address challenges.
“Blue-chip stocks with a history of growing earnings and dividends combined with covered calls may be an attractive solution,” Simpson said.
Specifically, the Amplify CWP Enhanced Dividend Income ETF (DIVO) owns high-quality large-cap companies with a history of dividend and earnings growth, along with a tactical covered call strategy on individual stocks. DIVO’s portfolio is strategically designed to offer high levels of total return on a risk-adjusted basis
DIVO is an actively managed income-generating tool. The fund writes covered calls on individual holdings, not an index. Selling covered calls involve selling options on underlying securities in which an investor already holds long positions. This strategy aims to guard against downside in the underlying security, generate some profits in sideways markets, and bolster a portfolio’s income stream. Furthermore, the dividend and option income may provide lower share price volatility compared to the overall market during times of broad-based market declines.
“Most investment strategies that implement covered calls utilize a systematic approach, writing them on every position automatically. We believe that knowing when to — and when not to — write covered calls is the key to success with this vehicle,” Simpson stated. “Based on market observations and income targets, we use a rules-based set of triggers to identify the best-covered call opportunities on high-quality blue-chip stocks.”
The strategy looks for opportunities to write covered calls when the VIX is at 15 or higher. Additionally, it will seek call premiums which will yield 2-4% on an annual basis.
Simpson believed that today’s heightened level of volatility could lead to higher premiums on a well-executed covered call strategy. The tactical approach to covered call writing seeks to enhance investment income whether markets go up, down, or sideways. With yields in the current market at historic lows, there is a dearth of income opportunities for retirees who are living longer and retiring in larger numbers than ever before. Additionally, investors can combat inflation by owning companies with a history of growing their earnings and dividends, a characteristic of the DIVO selection process.
Gavin Filmore, executive vice president and head of product development at Toroso Investments, also highlighted the ongoing struggle with inflationary pressures. For example, the cost of living is increasing with population growth expected to drive up housing demand and costs. The global cost of goods is rising, especially for basic raw materials and commodities, like corn, wheat, and energy, among others.
Meanwhile, global economies are faced with currency debasement after extremely accommodative monetary and fiscal policies that have contributed to an increased supply of money in the world.
As a way to help investors address the growing concerns of inflation, Filmore pointed to the Amplify Inflation Fighter ETF (NYSE Arca: IWIN), an actively managed strategy that invests in asset classes that seek to benefit, either directly or indirectly, from inflation. The actively-managed approach enables IWIN to identify and act on opportunities and risks across inflation-friendly asset classes. IWIN has a first-to-market approach of owning a mix of stocks and other securities, as well as futures linked to commodities. The portfolio comprises stocks, SPACs, convertible debt, commodity REITs, and ETFs or futures linked to commodities, including but not limited to oil, gold, and bitcoin.
IWIN is a diverse multi-faceted approach to fighting inflation. The fund strategy utilizes bitcoin derivatives, diverse commodities, and land development in contrast to other comparable ETFs.
“U.S. inflation rates are the hottest they have been in decades. Our multi-asset approach may help fight against inflation. Our tactical approach identifies stocks and commodities positioned to benefit, directly or indirectly, from inflationary pressures,” Filmore said.
Financial advisors who are interested in learning more about inflation-fighting strategies can watch the webcast here on demand.