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Enhanced income strategy provides income and reduces volatility


BMO Global Asset Management has a proud heritage in developing index linked products. It launched its first ETF in Toronto in 2009 and now has over 100 ETF listings globally. The firm is the second largest ETF provider in Canada. BMO Global Asset Management has CAD48.4 billion (as of April 2018) assets under management across its Systematic and ETF strategies.

Morgane Delledonne, ETF Investment Strategist at BMO Global Asset Management, explains that the firm’s Enhanced Income Equity Strategy has proved particularly popular in recent years. The strategy has been running in the UK for a year and is implemented by selling (writing) index call options against part of the equity portfolio, which replicates one of the regional stock indices (US, UK and eurozone).

Delledonne explains that by writing call options against an equity index, they forfeit some potential upside participation in exchange for an immediate additional cash flow over and above what would be received by simply holding the stock. Approximately half of the portfolio serves as collateral for the option writing strategy, and the other half fully replicates the underlying index.

The strategy is most likely to outperform in bearish, non-directional and slightly rising markets. Conversely, the strategy underperforms in a strong market rally.

Over the long-term, the strategy provides equity market exposure with greater income and lower volatility.

“We are currently seeing investors observing that volatility will increase in the medium term due to a combination of factors, which shows that there will be a need for more defensive strategies but also that higher volatility means we will be able to get a higher premium from selling call options on the portfolio so we target to increase the yield from 2 per cent to 3 per cent in the medium term.”

The product is popular with investors seeking income in the low interest rate environment which still exists, despite central bank interest rate increases in the US and the UK. “It offers an additional income stream that doesn’t increase risk and lowers the volatility because the option premium is diversifying away from traditional equity investing,” Delledonne says.

“At BMO in the UK we are focusing on providing a wide range of income solutions, and this innovative product democratises a strategy that has been used by institutions for a long time so it is quite timely.”

Delledonne has noticed that in the UK and across Europe, the use of ETFs is growing. “Now we have strategies that are performing well and clients are increasingly looking at long term allocations not just tactical.

“This is a long-term investment, reducing the risk of the overall portfolio and saving you some space to go for a more conviction trade. ETFs are now useful for tactical and short-term allocations as well so they have a broader use than in the past.” 

For professional investors only. Capital is at risk and investors may not get back the original amount invested.Shares purchased on the secondary market cannot usually be sold directly back to the Fund. Secondary market investors must buy and sell ETF Shares with the assistance of an intermediary (eg a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current Net Asset Value per Share when buying ETF Shares and may receive less than the current Net Asset Value per Share when selling them.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned.

© BMO Global Asset Management. All rights reserved. Issued and approved by BMO Global Asset Management, a trading name of F&C Management Limited, which is authorised and regulated by the Financial Conduct Authority.

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