Have clients nearing retirement, or looking to invest for retirement yourself? Current income may appeal as an addition to your portfolio. By adding active equity income in an ETF format, investors can get exposure to markets with income padding. Such a strategy could help if markets go sideways this year and a soft landing appears elusive.
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The Parametric Equity Premium Income ETF (PAPI) has had a strong debut since launching in October, 2023. The strategy charges 29 basis points (bps) and actively invests in U.S. dividend payers while adding a laddered call writing strategy on the S&P 500. The strategy has performed well over the last three months, outperforming its ETF Database Category average. It has more than doubled that and its Factset Segment averages over one month.
Of course, returns alone don’t speak to the entirety of the active equity income ETF’s case. As of February 29th, the ETF was offering a 6.57% distribution yield and a 3% 30 day SEC yield, per Morgan Stanley.
PAPI looks for durable dividend payers from the Rusell 3000 index. It considers 12-month yield and risk level. The active equity income strategy looks for diversification by equally weighting sectors. It also equal weights the top stocks within each sector.
PAPI’s short-dated, two-week call options come in tranches. Sometimes using FLEX options written on the underlying ETF, SPY, the SPDR S&P 500 ETF Trust, or the S&P 500 itself, the strategy offers premiums from those calls. While call options limit some upside, the active ETF provides a helpful boost from that current income.
With the U.S. economy doing well, but exposed to risks from lingering inflation and markets disappointed by missing rate cuts, adding income can help those prepared to retire and those just looking for income. As such, an active equity income ETF provides the flexibility and capital appreciation / income combo that appeals to a broad investor group.
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