As the bear market trudges on, volatility is likely to create turbulence. Additionally, inflation is poised to remain at elevated levels for some amount of time. This means advisors need strategies that prioritize income and reduce volatility. One such play can be found in the call option strategy of the NEOS S&P 500 High Income ETF (SPYI).
Launched back in August of this year, SPYI is a new fund that has gone under the radar but uses an actively managed, data-driven call option strategy. Working off of the SPYX Index, SPYI is a fund that takes advantage of tax-loss harvesting opportunities and gives investors a tax-efficient monthly income stream.
Call options can be challenging for some investors to wrap their heads around, but they have the ability to generate enormous amounts of income. Aside from enjoying a measure of downside protection, covered calls also allow the premiums for sold options to be kept as income. Combined with funds that are already generating dividends, call options could become income superstars.
Down Years Drive Dividends
It isn’t a surprise that dividend ETFs have seen $50 billion in flows in 2022. Down markets tend to drive investors toward defense plays, such as dividends. Options overlay strategies are also having a moment, with VettaFi vice chairman Tom Lydon noting on a recent “ETF of the Week” that covered call strategies make for a compelling diversifier in the dividend sleeve of an investor’s portfolio.
“I think that we are probably going to move into a decade of very, very poor growth in which developed economies are going to find themselves lucky with 1% growth per annum, if they are able to achieve it, and what is more unfortunate than everything else is with elevated levels of inflation,” Daniel Lacalle, author and chief economist at Tressis Gestion, said on CNBC’s Squawkbox.
SPYI is the kind of fund that thrives in down market years, and given the gloomy forecasts for 2023, it could be a smart play for investors looking for income to stay ahead of inflation and defend their portfolios.