The latest data from the Federal Reserve reflects a diminished outlook for growth this year. With stagflation and recession concerns on the rise, investors looking to hedge their income in quality companies would do well to consider the Parametric Equity Premium Income ETF (PAPI ).
The most recent FOMC meeting revealed Federal Reserve members lowering expectations for GDP growth this year in the U.S., reported WSJ. The potential inflationary impact of tariffs and economic policy volatility create a challenged outlook for U.S. equities in 2025. Quality companies generating reliable dividends often prove an attractive haven within equities during periods of economic drawdown.
PAPI seeks to generate consistent monthly income as well as capital appreciation. It does so by investing in an actively managed portfolio of dividend-paying equities chosen from the Russell 3000. It uses top-down, systematic analysis to select quality companies.
The strategy seeks stable, dividend-paying companies while diversifying its equity exposures. Companies included demonstrate 12 months of high current income and reduced risk within their sectors. The quality equity portfolio is also diversified across sectors, with sectors equally weighted.
Parametric Portfolio Associates LLC, the subadvisers of the fund, use a systematic approach to writing short-dated, laddered, out-of-the-money calls on the S&P 500 index or the SPDR S&P 500 ETF Trust (SPY ).
A covered call option entails selling the right (but not obligation) to buy an underlying stock at an agreed-upon strike price by a specific date. Call writers earn a premium for selling the covered call, generating differentiated income potential.
The strategy minimizes costs by writing options with an expiry of two weeks, on average. This differs from many options-based equity strategies on the market with options that roll more frequently. Options that roll daily or weekly may contribute to increased costs passed on to investors. A systematic option-writing approach introduces a level of predictability while potentially reducing costs.
The laddered calls generate premiums as well as allow for more upside appreciation potential compared to a single call option position. Because the options are laddered, in a rising market environment, should a covered call position be called away, other positions remain to participate.
PAPI generated a distribution rate of 6.01% as of February 28, 2025. Distribution rate annualizes the most recent distribution and divides it by the fund’s most recent NAV. It’s a forward-looking indicator of what investors could potentially earn in the next year if distributions remained the same.
PAPI carries an expense ratio of 0.29%.
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