Market analysts are split on whether the U.S. Federal Reserve will cut rates at a swift pace or to take a more measured approach amid sticky inflation. Either way, rate cuts appear inevitable. Thus, investors will want to supplement their fixed income, especially if their portfolio is heavily concentrated in bonds.
One way to diversify a fixed income portfolio is via option income. On that note, Invesco has a triage of funds to consider. These funds can eliminate the interest rate risk associated with bond income. Knowing that their income isn’t predicated on whether the Fed will cut or hike interest rates gives investors peace of mind.
Investors who sell options give the buyer an opportunity to buy or sell an underlying asset at a future date and predetermined price. The income generation occurs when the seller collects a premium from the option buyer. This makes options a viable solution in generating a steady stream of income while still capturing any upside in equities.
Three Invesco ETFs With Options
Invesco has three ETFs to consider with options focused on exposure to three popular indexes:
- Invesco QQQ Income Advantage ETF (QQA) seeks to provide investors exposure to the often-traded Nasdaq-100 Index, combined with an active option income overlay for income generation, downside protection and upside participation. As of December 23, the fund features a 30-day SEC yield of 7.43%.
- Invesco S&P 500 Equal Weight Income Advantage ETF (RSPA) seeks to provide investors exposure to the S&P 500 with an equal-weight strategy slant, combined with an active option income overlay for income generation, downside protection and upside participation. The fund has a 30-day SEC yield of 5.41%.
- Invesco MSCI EAFE Income Advantage ETF (EFAA) seeks to provide investors exposure to the MSCI EAFE Index, combined with an active option income overlay for income generation, downside protection and upside participation. The index tracks the performance of large- and midcap securities across 21 developed markets. Those markets include countries in Europe, Australasia and the Far East, and exclude the U.S. and Canada. This is an ideal option for fixed income investors looking to diversify beyond U.S. borders. EFAA’s 30-day SEC yield is 4.88%.
To obtain exposure to their respective indices, the funds use equity-linked notes or another ETF tracking that particular index. To maintain liquidity and add downside protection, each fund may also hold assets in cash or its equivalents.
“We’re laddering the option overlay on a near-daily basis, so that the portfolio is constantly adapting to market conditions,” said John Burrello, senior portfolio manager for the Invesco Income Advantage Suite. “And more tangibly in the context of upside capture, that means that we’re moving the upside potential market participation each day.”
Actively Generated Income
For fixed income investors new to options, the complicated, sometimes-esoteric nature of these investment vehicles may produce a level of angst and uncertainty. That said, all three funds are actively managed. That essentially puts the funds under the control of seasoned market professionals.
Actively managed funds allow portfolio managers to adjust their holdings based on the current market conditions. This allows for built-in volatility control without the investor having to constantly monitor their portfolio. Instead, the professional makes the adjustments themselves when market activity spikes. Furthermore, Invesco partners with several reputable global banks for the execution of their customized option strategies in the aforementioned funds.
For more news, information, and analysis, visit the Innovative ETFs Channel.
