Volatility creates several challenges for advisors and investors, but also opportunities for those who know where to look. Michael Buckius, CFA, president, CEO, CIO of Gateway Investment Advisers LLC, recently discussed the current market environment, ongoing volatility, and why investors should consider the Natixis Gateway Quality Income ETF (GQI ).
Buckius, alongside Cinthia Murphy, investment strategist at VettaFi, talked through the opportunities volatility creates for options strategies and investors in a livecast hosted on the VettaFi platform earlier this month.
“We specialize in options-based risk management,” Buckius said of Gateway Investment Advisors. The firm offers these types of strategies as a way to balance long-term equity ownership risk while also generating income. "We also specialize in building quantitative equity portfolios that track indexes and tax loss harvesting, and in some cases — like with our new ETF offering — build factor tilts into broad, diversified investment portfolios.”
Gateway Brings Depth of Experience to Options Investing
Gateway Investment Advisers manages one of the largest and oldest hedged equity mutual funds on the market, the Gateway Fund. The firm is part of Natixis Investment Managers and launched the actively managed GQI last December.
GQI constructs an equity portfolio strongly tied to the quality factor and with a long-term growth outlook, then combines it with a call-writing strategy to generate monthly income. According to Buckius, since its launch, the fund has provided around 80% of the risk of the S&P 500 and five times the income.
The equity portfolio focuses on companies within the S&P 500 that demonstrate several quality characteristics. These include high cash flow generation, elevated return on assets, good and responsible use of capital, and dividends and buybacks to shareholders.
The quality tilt creates a portfolio that currently slightly overweights consumer discretionary and information technology while underweighting REITs, utilities, and banks. Overall, though, the strategy closely represents the S&P 500, according to Buckius. It also considers updated company information and will rebalance accordingly to capture high-quality stocks and reduce exposure to lower-quality ones. This provides a dynamic approach to equity investing.
Why Market Volatility Proves Beneficial for GQI
Call writing strategies like GQI make a notable addition to an income portfolio, pairing well with high dividends and preferred strategies. Because the income is derived in part from the premiums earned on-call writing, it provides a diversified income stream from more traditional equity strategies.
The fund also fits well within an equity portfolio, providing risk-managed exposure to stocks. “The options income from the writing strategy tends to dampen down volatility,” Buckius noted. “It can be a way for investors who want equity exposure but aren’t willing or able to take the full risk [to] have a bit of a risk-managed approach.”
The current environment of ongoing market volatility makes funds like GQI well-positioned. The options portion of the strategy monetizes volatility, earning higher premiums and income when volatility spikes. Additionally, the shift in market regimes from a prolonged period of quantitative easing to one of tightening and ongoing, elevated interest rates creates added value.
“Those two features make option writing compelling in general, but have really… made the value proposition of an income-based option strategy more compelling,” explained Buckius. “I don’t know how great our crystal ball is, but we expect those two features in the market to continue, even if rates continue to come down a little bit.”
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