How An Options-Based Global Equity ETF Can Potentially Boost Income

Income-oriented investors are seeking better payouts these days---and for good reason. The cost of living has skyrocketed since the pandemic. What’s more, due to the seemingly relentless rise of the stock market, dividend yields on quality companies have fallen significantly—and arguably the risk of a serious market correction has increased. So, what’s a risk-aware income investor to do?

An Innovative, Two-Story Approach to Generating Income

A potential solution to this dilemma may be to pursue an options-based ETF strategy that leverages dividend-paying global equities. Think of this income approach as something akin to a two-story house. The “main floor” are the reliable dividends paid quarterly by a diversified portfolio of global companies listed on U.S. exchanges. To this, we add on the “second floor”, which are options premiums written to potentially generate even more income for investors. This results in an enhanced income approach as compared to a “bungalow” strategy of relying solely on dividend payments.

The SGI Enhanced Global Income ETF (GINX) pursues this two-story approach with the aim of delivering added yield to investors. Beyond the twin income components, the Fund’s managers focus diligently on risk-management, understanding that large drawdowns have the potential to eclipse any long-term income gains in a portfolio. By developing strategies like GINX that keep careful watch over the ways volatility can affect portfolios, we believe investors have a better opportunity to experience the true power of compounding returns.

Risk Management Has Its Rewards

SGI’s Portfolio Managers constantly focus on risk management through the firm’s Managed Risk Approach^®.

• This approach starts with portfolio diversification, recognizing that too much concentration in any one stock is asking for trouble.
• Technology plays a part, too. SGI utilizes proprietary software incorporating data from multiple providers in an attempt to predict how each underlying stock may perform in various market environments.
• Next, the potential return of each portfolio security is analyzed, focusing on factors that have historically predicted past performance.
• In the third step, optimization, the managers look at how the different stocks and asset classes they represent might interact with each other in the portfolio. In other words, what combination of stocks has the highest potential to lead to the best return with the lowest volatility?
• There’s one final step in SGI’s risk management process. The portfolio management team is constantly searching for what it likes to call “dry powder”—these are idiosyncratic kinds of risks that are “sitting in the corner and could catch fire,” leading to sharp declines in the price of an investment. Think: litigation, SEC investigations, or the sudden resignation of a Chief Financial Officer. These issues may balloon into big problems for companies and their share prices. If the GINX team spots dry powder, they get out, no emotions, no questions asked.

GINX is an actively-managed ETF, which means it's not completely at the whim of the market—the Fund’s managers can add or reduce risk as they deem appropriate based on market conditions.  This can be beneficial in times of both investor panic and heightened exuberance.

Yearning for Earning: Today’s Income Investors Are Demanding More

Income-oriented investors can be understandably frustrated by the current economic and financial landscape. The pandemic appears to have permanently increased consumer prices, a consequence of supply-chain issues and massive government stimulus programs. And while the rate of inflation is trending down, the level of prices keeps going up. With life becoming ever more expensive, the need for greater income has become a pressing concern for many investors.

In “normal” times, simply owning dividend stocks might have satisfied an investor’s income needs. Alas, the frothy stock market in 2024 is anything but normal. At 1.43%* the current dividend yield on the S&P 500 compares quite unfavorably to its historical average of 2.91%.** Today’s valuations strongly suggest that investors are accepting outsized risk in exchange for diminished income—hardly an attractive trade.

*S&P 500 yield as of June 8, 2024.

**Historical S&P 500 dividend yield.

Benchmark dividend yields also fail to compensate investors for the current rate of inflation. Based on April’s CPI report, U.S. consumer prices are increasing at an annual rate of 3.6%, meaning that the S&P’s real dividend yield is negative to the tune of 1.6%.

The Many Benefits of an ETF Structure

GINX is structured as an ETF, and thus sports the key attributes that have made these vehicles so popular with investors. Some of the major benefits to owning ETFs include:

• Intraday Trading: ETFs trade as stocks on major exchanges. As such, they can be sold whenever the market is open.
• Transparency: As a fully transparent ETF, GINX’s complete portfolio is published each trading day. Investors can see all positions, broken down by security and weighting. They’re never in the dark, and don’t have to wait until month or quarter-end to see what their fund owns.
• Efficiency: ETFs tend to trade at or near their Net Asset Value (NAV) due to the nature of the ETF ecosystem. If the market price of a fund deviates from the NAV, market makers and Authorized Participants can arbitrage the difference, which ultimately brings the price back in line with its underlying value.
• Tax-Advantaged: Compared to other investment wrappers, ETFs tend to realize fewer capital gains. In part, this feature is due to the creation/redemption mechanism, whereby the managers can facilitate redemption requests without selling appreciated securities. This is advantageous for a fund’s investors because it means their tax bill is lowered.

How GINX Works—and How It Can Work for Investors

GINX seeks to generate current income and enhanced yield by actively investing in global companies (primarily large- and mid-cap) that currently offer dividend income. Emphasizing reduced volatility through disciplined value investing, the goal is to outperform and receive higher dividend yields when compared to the underlying indices. GINX also integrates an innovative, actively traded put and call options strategy. This strategy is designed to utilize the liquidity and volume of the S&P 500 Index or other broad benchmark indices to produce additional income with a dedicated emphasis on risk control.

The Fund aims to enhance income by frequently selling short-term options (usually less than one week in duration), which typically generates more income than selling longer-term options over the same period. In addition to its options investments, the Fund may hold short-term U.S. Treasury securities as collateral for the options and to generate income. Finally, the Fund may also seek to increase its income by lending securities.

In the face of economic uneasiness including inflation, fluctuating interest rates, a string of bank failures, heightened geo-political volatility, and possible euphoria over the promise of a soft landing for the market, investors continue to look for preservation of capital, increased income, and higher yields. GINX implements a risk-averse, actively managed approach to potentially provide improved income compared to traditional core income investment strategies.

Conclusion: A Compelling Global Income ETF Across Market Cycles

Whether markets are exuberant or subdued, the enhanced income approach practiced by GINX was built with two primary objectives in mind: 1) to help investors mitigate the dangers that dramatic downturns in the market can present, and 2) to offer them enhanced income with a better opportunity to experience the true power of compounding returns. In good times, the Fund has the potential to benefit from rising equity prices, while also generating income from multiple angles for investors. In down markets, GINX doesn’t carry the full weight of equity-only investments and can accumulate quality companies at discount valuations. And no matter the investing season, the ETF’s managers apply a rigorous focus on downside risk management to best protect investor capital.

To learn more, visit https://sgiam.com/etfs/enhanced-global-income/

Definitions:

Dividend yield: Displayed as a percentage, the amount of money a company pays shareholders for owning a share of its stock divided by its current stock price.

Disclaimer

Nasdaq® is a registered trademark of Nasdaq, Inc. The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Neither Nasdaq, Inc.  nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding Nasdaq-listed companies or Nasdaq proprietary indexes are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.

Important Risk Information

Carefully consider the Fund's investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found in The SGI Enhanced Global Income ETF's prospectus. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal. The Fund is a newly organized, diversified management investment company with no operating history. To the extent the Fund invests in Underlying Funds that invest in fixed income securities, the Fund will be subject to fixed income securities risks. While fixed income securities normally fluctuate less in price than stocks, there have been extended periods of increases in interest rates that have caused significant declines in fixed income securities prices.

To the extent that a Fund invests in Underlying Funds that invest in high-yield securities and unrated securities of similar credit quality (commonly known as “junk bonds”), the Fund may be subject to greater levels of interest rate and credit risk than funds that do not invest in such securities. Small cap companies that the Underlying Funds may invest in may be more volatile than, and not as readily marketable as, those of larger companies. Small companies may also have limited product lines, markets or financial resources and may be dependent on relatively small or inexperienced management groups.

Underlying Funds that invest in foreign securities may be subject to special risks, including, but not limited to, currency exchange rate volatility, political, social, or economic instability, less publicly available information, less stringent investor protections and differences in taxation, auditing, and other financial practices. Investments in emerging market securities by Underlying Funds are subject to higher risks than those in developed countries because there is greater uncertainty in less established markets and economies.

To the extent the Fund invests in Underlying Funds that focus their investments in a particular industry or sector, the Fund’s shares may be more volatile and fluctuate more than shares of a fund investing in a broader range of securities. The Fund’s investments in derivative instruments including options, forward currency exchange contracts, swaps, and futures, which may be leveraged, may result in losses. Investments in derivative instruments may result in losses exceeding the amounts invested. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with investments in more traditional securities and instruments.

Diversification does not eliminate the risk of experiencing investment loss.

Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the funds. Brokerage commissions will reduce returns.

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