Managing equity risk in an aging bull market

Investment strategists discuss the role of low volatility strategies in the late expansion phase of the business cycle.

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With more than 40 years of experience using index options to manage equity risk, Gateway Investment Advisers offers unique insights on market volatility. Gateway’s Chief Investment Strategist, Dave Jilek, joins Clarice Avery for an in-depth look at the cyclical nature of equity market volatility and its relationship to options-based equity investing.

The ups and downs of volatility
A closer look at the history of market volatility shows distinct periods of high and low phases. The current low-volatility environment has been in place since mid-2012, with only occasional volatility spikes. However, based on where we are in the equity market and economic cycles – both of which have been advancing since 2009 – there is reason to expect that volatility will increase. Gateway’s option-based strategy can potentially benefit from equity market turbulence.

Gateway’s long history of consistent low-volatility equity investing may seem to be a passive strategy, but the fund’s managers are active in identifying alpha opportunities and enhancing risk-adjusted returns. Rather than rely solely on asset allocation to smooth the long-term ride for investors, the Gateway strategy uses an index option-based risk management framework.

In today’s market environment, with interest rates low and likely to rise over the long run, it may be harder to offset equity risk with fixed income (bond prices fall as interest rates rise). Incorporating an option-based risk management strategy into a diversified portfolio may provide a better chance for exposure to the return potential of stocks, but with a lower volatility profile.
Options carry a high level of risk and are not suitable for all investors.

This material is provided for informational purposes only and should not be construed as investment advice.

Index option (European-style expiration, cash settled and exchange-traded): an option contract on an index (e.g., S&P 500) in which the buyer (owner) pays a cash premium up front to the seller (writer) of the option. If at expiration, the option contract is in-the-money, the seller pays the owner cash in the amount of the difference between the option strike price and the current value of the index; otherwise, the option expires worthless for the buyer and the seller keeps the full premium received up front. The writer of an option is paid a cash premium for taking on the risk associated with the option obligation to pay if the option expires in-the-money. Listed index options contracts can be closed or traded prior to expiration date, but not exercised. Volatility management techniques may result in periods of loss and underperformance, may limit the Fund's ability to participate in rising markets and may increase transaction costs. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Alternative investments involve unique risks that may be different from those associated with traditional investments, including illiquidity and the potential for amplified losses or gains. Investors should fully understand the risks associated with any investment prior to investing.

All investing involves risk, including the risk of loss. There is no assurance that any investment will meet its performance objectives or that losses will be avoided. Investors should fully understand the risks associated with any investment, or investment strategy, prior to investing.

Call options can reduce the risk of owning stocks, but can limit returns in a rising market. The fund's use of options in managing volatility or in the pursuit of investment returns may not be achieved.

Put options: The buyer of a put option has the right to sell an asset at an agreed-upon price (“strike price”) within or at a specified time. The seller of the option has the corresponding obligation to buy the asset at the strike price if the buyer exercises the option within or at the specified time. The buyer of a put option risks losing the amount paid for the option if the price of the asset does not fall below the strike price. The seller of a put option risks losing the difference between the asset’s price and the option’s strike price, less the amount received from the sale of the put.

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