Just like that, September is here. School has begun, as has the start of seasonal volatility. History shows that stocks, as measured by the S&P 500® during the past 25 years, have done fairly well during the summer months but have struggled at times come early fall – particularly in September.
Performance shown represents past performance and is not a guarantee of future results.
Source: Bloomberg.
Seasonal headwinds are also present in the CBOE Volatility Index (VIX), a popular measure of the stock market’s expectation of volatility based on S&P 500® index options. As you can see in the chart, the VIX has experienced some of its more vicious spikes in September.
Performance shown represents past performance and is not a guarantee of future results.
Source: Bloomberg.
Layer on top of this seasonality factor a tense geopolitical climate and a challenged Fed whose dual mandate of stable prices and maximum employment is getting increasingly harder to achieve in the face of tariff-induced inflation and slowing economic growth. With this backdrop, it’s really not hard to see how the stock market may be choppy this fall.
Our research within the Natixis Investment Managers Solutions’ Portfolio analysis and consulting team shows that income in a volatile sideways market can offer a cushion for returns when price isn't cooperating.
Equity income? So you mean dividend stocks? Not necessarily.
Dividend yields have been going down for some time now. Companies are choosing to repurchase their shares instead of paying out dividends like they had in the past. There are a few reasons why:
So what’s an alternative to dividend stocks for generating income? The financial industry has noticed this trend of less and less dividends and more and more buybacks – yet the desire for a reliable source of income still persists among investors. But there is a solution to consider.
At a high level, a derivative income strategy works like a stock portfolio, but with a twist. A manager will own either a basket of stocks or a broad market index (some strategies even work with a single stock), but then write call options on either the underlying basket or a broad market index.
An added benefit of this structure is that option premium rises when volatility increases. The VIX, by definition, measures expected volatility of stocks. When stocks get volatile, the VIX rises and so do the option premiums, allowing derivative income strategies to collect more income.
Old-school practitioners have been following this process for a while – writing call options on the basket of stocks that they own for their clients. But today, this can be a useful tool in a financial advisor’s kit to free up time and provide a wider range of services to their clients. For more insight, read The rise and benefits of derivative income ETFs.
Finally, with the VIX being muted so far this year, outside the tariff spike back in April, now may be a good time to consider how a derivative income strategy may help fortify your portfolio while delivering income.
The S&P 500® Index or Standard & Poor's 500 Index is a market capitalization–weighted index of 500 leading publicly traded companies in the US.
VIX is the ticker symbol and the popular name for the Chicago Board Options Exchange's CBOE Volatility Index®, a popular measure of the stock market's expectation of volatility based on S&P 500® index options.
Earnings per share (EPS) is a commonly used measure of a company's profitability, calculated by dividing a company's net income by the total number of outstanding shares. It indicates how much profit each outstanding share of common stock has earned.
All investing involves risk, including the risk of loss of principal. Investment risk exists with equity, fixed-income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
A call option conveys the right, but not the obligation, to buy an asset at an agreed-upon price (“strike price”) within a specific time period. The buyer of a call option risks losing the amount paid for the option if the price of the asset does not exceed the strike price. The seller of a call option risks losing an amount equal to the asset’s price less the amount received from the sale of the call. Call options can reduce the risk of owning stocks, but it can limit returns in a rising market.
An option premium is the price paid for buying an option contract. The price of the premium is determined by various factors such as time until expiration, dividends, price of the stock, and volatility.
Dividend yield is a ratio that demonstrates a company's annual dividends relative to its shares' market price.
ALPS Distributors, Inc. is the distributor of the Natixis Gateway Quality Income ETF. Natixis Distribution, LLC is a marketing agent. ALPS Distributors, Inc. is not affiliated with Natixis Distribution, LLC.
