Navigating Market Uncertainty: The Rise of Options Income ETFs

Auctions trading can be risky for retail traders if they're wrong about a stock.

The calls or puts expire worthless.

As in regular stock trading, there are ETFs that can help retail traders out.

Now Option income ETFs generate income primarily by using options strategies, typically selling call or put options on underlying stocks or indexes.

Now these funds seek to provide.

Income enhancing strategies while sometimes also aiming to reduce risk or volatility in a portfolio.

Joining me this morning is John Barrello, senior portfolio manager of the Income Advantage ETF suite at Invesco.

John, great to have you here.

Thank you so much for joining us.

Thanks for having me.

Well, first and foremost, we know that options income ETFs are growing in popularity, so tell us why investors are returning to them.

I think it really comes down to market uncertainty, and there's plenty of it, you know, whether it's stocks or interest rates.

There's a lot of kind of movement, transition, uncertainty.

Option income ETFs offer a way to deal with that uncertainty.

They let you stay invested in the stock market with the addition of monthly income that's not rate sensitive and with less volatility, so they give you a smoother ride.

And you mentioned a key word here because 2025 has been the year of volatility.

So whether we're talking about equities or even rates policy, public policy, monetary policy, we see a lot of volatility.

So for viewers out there who may not be as familiar and they're asking, what should I keep in mind when it comes to these products, what would you say to them?

Yeah, when looking at option income ETFs and funds, there are a lot that have been launched in the last couple of years, and the key is that the design details under the hood, they matter a lot.

They can really impact performance, you know, the way these strategies are built.

And so what I always like to say is, you know, first look, did this strategy get launched by options professionals or these people who've been managing money with option-based portfolios for a long time, or does it seem like it was kind of a filler to get a product gap, you know, taken care of in the in the asset managers line up?

So that's one thing.

Who's managing the portfolio?

Um, but also there are some really key design choices that have to be made regardless of what the option income strategy is.

So a few of those.

One is think about, you know, when you, when you trade a covered call, you want to have a match between the underlying stock and the option that you're using.

Well, in option income ETFs, a lot of times you might see a mismatch between the equities and the options.

So we think it's really important to look for a match between the underlying portfolio and the options being used.

The second thing is to think about diversification.

So is the overlay, the options strategy itself diversified?

We think options strategy should be diversified just like stocks or bonds or any other asset class, and oftentimes you don't see that.

So that's something to look out for.

And then consistency is another element.

So can the strategy actually deliver consistent monthly income so that you know what to expect on a monthly basis in terms of the yield profile?

And then lastly, a balance of the yield and the growth is really important.

So you don't want something that only has high income but then stunts all your growth in the equity markets.

You want to participate in the market upside while you're collecting that income.

Yeah, and it might seem like second nature or common sense to you, but you mentioned some key words there including diversification, balancing, as well as consistency.

So tell me about what you're doing over at Invesco, yeah.

So the way we manage our income advantage ETFs, we have 3 of them.

There's QQA that's based on the NASDAQ 100.

It has an SEC yield of 9 to 10%.

We have RSPA based on the S&P 500 equal weight index.

It has an SEC yield of 8 to 9%, and then EFAA is based on MSCI EFA, so that's international stocks.

It's SEC yield is 7 to 8%.

So the way we manage the portfolio, it's really a focus on the consistency of the outcomes.

So we take a step back in plain language, what are we trying to accomplish?

It's really to allow investors to stay invested in those three core indices but do so with yields that they can that they can count on through time on a monthly basis that aren't sensitive to interest rates and with less volatility.

So you know we talk about diversification.

One thing we do is we ladder the options strategy through time so that we smooth the path dependency of the portfolio, and that leads to smoother outcomes.

That helped us a lot in the volatility in April and May where we were able to protect some of the downside risk but then also participate in the recovery because we're diversified on the option overlay side.

Then it's also important for the balance of the yield and growth.

We want to be able to again participate in the growth of the market, not just offer yield, so you really have a few sources of return.

You have the option premium we're collecting.

You've got dividends on the stocks and some of the upside that you can get in the broader markets.

Yeah, and John, you're talking about a lot of moving parts there, but investors out there, they're concerned about performance.

So very quickly give us an understanding of the performance, yeah.

So the performance profile of the income advantage ETFs is basically you think about it in terms of market regimes or the types of markets we run into.

Down markets we're built to outperform because we're not using leverage.

It's a very conservative approach and we're collecting that income.

So when markets fall, that serves as a nice downside buffer.

Flat markets, same thing.

If the markets don't move, we're still collecting that income, so we're built to outperform there.

And then in sharply rising markets we're going to underperform.

We're giving up some of that upside in return for the income and the defense that you get from these types of strategies.

And so when you get a mix of those types of environments, as you do usually. a full cycle, you get down markets flat and up.

We can actually keep pace with the broader markets if we get, you know, kind of a broader, you know, different types of market movements.

Well, John, we will have to leave it there, but thank you so much for simplifying this and for joining me today at the New York Stock Exchange.

Thank you.

I appreciate it.

Thank you.