Andrew Ross Sorkin
The CBOE Volatility Index (VIX), commonly referred to as Wall Street’s fear barometer, has just experienced its most turbulent week since April, signaling heightened uncertainty in the market. With volatility shaking investor confidence, some are looking for more stable strategies to weather these fluctuations.
John Burrello, Senior Portfolio Manager at Invesco and a member of the firm’s global asset allocation team, believes that income funds utilizing options-based strategies may offer a practical solution in this environment. According to him, these strategies inherently provide structural protection that traditional stock portfolios may lack.
“Options are not dependent on the correlation of equities with other asset classes,” Burrello explained during an appearance on CNBC’s “ETF Edge.” He emphasized that options-based income strategies can deliver more consistent downside protection while generating returns that are not influenced by interest rate movements.
This characteristic becomes especially valuable as the market anticipates a shift in monetary policy. Consensus among Wall Street analysts suggests that policymakers are likely to implement a quarter-point rate cut later this month. In such a scenario, strategies that generate income independently of the Federal Reserve’s decisions may present a strategic advantage.
“Generating income without counting on Fed policy is becoming increasingly important,” Burrello noted. “That growing need is driving significant momentum in this segment of the ETF market.”
Invesco currently offers several options-based income funds, including the Invesco QQQ Income Advantage ETF, the Invesco S&P 500 Equal Weight Income Advantage ETF, and the Invesco MSCI EAFE Income Advantage ETF. Performance data so far this year shows that the Invesco MSCI EAFE Income Advantage ETF has risen approximately 14%, while the QQQ Income Advantage ETF has gained around 6%. Both funds have also recorded a two percent increase over the past week. In contrast, the Invesco S&P 500 Equal Weight Income Advantage ETF has remained largely unchanged on a year-to-date basis.
Looking ahead, Burrello sees long-term potential in options and defined outcome strategies, noting they may continue to attract investor interest for years to come. “There’s a substantial long-term tailwind behind income and defensive strategies,” he said. “The need for income generation and protection against equity drawdowns is timeless. At various stages of life, investors may seek to limit their exposure to equity risk while also adding diversified sources of income that are not tied to rate movements.”
However, the rapid influx of new options-based income ETFs into the market presents challenges for investors trying to differentiate between them. Burrello advises investors to be discerning when selecting products in this category. His key recommendations include choosing ETFs managed by professional institutional-grade options experts, avoiding products offering unrealistically high yields, and being cautious of funds with potentially excessive fees.
As volatility persists and monetary policy transitions, options-based income strategies may continue to gain traction among investors seeking balance between protection and performance. For those aiming to stay resilient in shifting market conditions, such funds could offer a compelling approach to generating income while managing risk more effectively.
