The CBOE Volatility Index, also known as Wall Street’s fear indicator, is coming off its most volatile week since April.
John Brero, senior portfolio manager at Invesco, sees income funds that employ options-based strategies as a sound strategy for investors hesitant to ride out the recent volatility. His reasoning is that more structural protection is embedded.
“Options are not dependent on the correlation between stocks and other asset classes,” Brelo said this week on CNBC’s “ETF Edge.” “It provides a more reliable form of downside protection and also provides income that is not subject to interest rates.”
Brelo, who is part of Invesco’s global asset allocation team, suggests this should be an advantage for investors due to the rate cut cycle. According to Wall Street consensus, policymakers are expected to cut interest rates by a quarter of a percentage point later this month.
“It’s becoming increasingly important to grow revenue without relying on the Fed, and I think that’s driving some growth in this area,” he said.
Invesco’s income producing funds include Invesco QQQ Income Advantage ETF, Invesco S&P 500 Equal Weight Income Advantage ETF, and Invesco MSCI EAFE Income Advantage ETF.
So far this year, the Invesco MSCI EAFE Income Advantage ETF is up about 14%, and the company’s QQQ Income Advantage ETF is up about 6%. It has risen about 2% in the past week.
Meanwhile, the Invesco S&P 500 Equal Weight Advantage ETF was nearly flat for the year.
“Never goes out of style”
There are “huge tailwinds” for options and clear outcome strategies that could last for many years, Brelot said.
“The demand theme of protecting against the depreciation of income and capital should never go out of style,” Brelot said. “These are things that any portfolio is likely to need at some point in their life. You may want to reduce your exposure to equities, or you may want to add a diversified source of income that is not dependent on interest rates.”
Brelot believes that the options income space has attracted many new product launches, which can make it difficult for investors to understand the differences.
His advice is to look for option income ETFs managed by institutional-level options experts and be wary of unsustainable yields that can lead to high fees.
