Inflation is the top investment risk for Financial Advisors:
What does this mean for income generating portfolios?
By: Yanni Angelakos, Head of Investment Insights, Nasdaq Capital Access Platforms
Over 400 financial advisors and wealth management professionals participated in a Wealth Management IQ survey (the “Survey”) commissioned by Nasdaq Global Indexes during the first half of May 2025. 44% of respondents identified “Inflation” as their top primary risk to income portfolios over the next 12 months (details below).
Figure 1
Explore more key insights from the survey here.
Current inflation environment & outlook
The Federal Reserve’s preferred measure of inflation—the Personal Consumption Expenditures (“PCE”) Price Index measuring core (ex-food and energy) pricing on a year-over-year basis—has moderated from its post Covid-19 high of 5.6% in February 2022. With a current annual rate of 2.9%, though, it remains well above the Fed’s target of 2%.
Factors such as (what had been) tighter labor markets, ongoing consumer demand for both goods and services, and high home prices have contributed to a stickier inflation environment.
Year-to-date, the market and economy have also had to contend with the increased prospects of pass-through effects from higher prices on account of U.S. trade policies. Based on the latest—though not finalized—trade agreement frameworks, the estimated effective import tariff rate according to The Budget Lab is in the 15% to 20% range, the highest since 1934. Uncertainties around U.S. economic and fiscal policies have also contributed to a weaker U.S. dollar which increases import costs.
While, there are mixed indications that higher prices are beginning to filter through to corporate America and the U.S. consumer via recent Consumer Price Index (“CPI”) and Produce Price Index (“PPI”) reports, investors were assuaged in the near-term as, overall, the latest inflation reports were broadly in-line with expectations. Combined with a weakening employment backdrop as the three-month average for non-farm payrolls is just 29,3000—lowest since September 2010—the markets are pricing in up to two more Federal Reserve rate cuts in 2025 and up to an additional three in 2026 (per Bloomberg). The Fed’s employment mandate is clearly outweighing its inflation mandate, for now.
Where to from here?
The inflation debate and questions around the yet unrealized and unquantified impacts from higher trade tariffs will likely persist in the near term. Although, we do not profess to be inflation experts, there are a mix of economic indicators we can monitor for a potential direction of travel for U.S. inflation.
For example, per Figure 2 below, the ISM Services Prices Paid Index still points to the scope of an upward trend for headline CPI on a year-over-year basis.
As a measure of real-time inflation expectations, the markets will continue to watch the likes of U.S. 1-, 5-, and 10-year breakeven inflation rates (nominal Treasury yield less the yield of the corresponding inflation-linked bond (TIPS) with the same maturity date). Although these indicators are off of their year-to-date highs, they remain elevated relative to a year ago. (Figure 3).
Lastly, and arguably most importantly for an on-the-ground read, investors will continue to look for insights as to whether companies are passing along the pricing increases from higher import costs to the end consumer, if they are absorbing these costs, or if it is some combination of the two.
Figure 2
Source: Wells Fargo Securities
Figure 3
Source: Bloomberg
Impact from inflation on income & ETF option strategies
For income-oriented investors, the directionality of inflation is paramount given the reaction function from monetary policy and the ensuing impact on interest rates which can drive asset allocation decisions. Higher inflation tends to lead to higher interest rates which can negatively impact the value of fixed-income securities and is therefore a drag on total returns for bond portfolios. Given the “higher-for-longer” interest rate environment since 2022 when the Fed undertook its most aggressive interest rate hiking cycle in 40 years to combat the spike in inflation stemming from Covid-19, investors were reminded that traditional fixed income is not without risks.
These dynamics may explain the rapid rise of options-based strategies in the exchange-traded fund (“ETF”) space (Figure 4) as these strategies can generate a consistent income stream in volatile or stagnant markets while in rising equity markets. Additionally, they can benefit from the value appreciation of the underlying asset.
Figure 4: AUM in option overlay ETFs
Source: Morningstar, Nasdaq Index Product Development. Notes: based on U.S.-listed ETFs with option overlay as key component of investment strategy. Monthly AUM from December 2014 – March 2025.
These ETFs are overwhelmingly linked to indices which deliver Covered Call strategies (selling a call option against a stock or ETF already owned to generate income from the premium received) where the ETF owner is effectively selling an out of the money call option while holding a corresponding delta one position in the underlying asset. Both inflation and volatility, are associated with positive impacts on the prices of call options. So, by selling more valuable call options, these ETF holders are reaping more premium from the sale of call options in a favorable market environment. The underlying assets, stocks, are also attractive on a relative basis as earnings adjust to inflation over the long term.
On the flip-side, while inflation can increase option premiums, it also introduces risks—particularly the potential for equity drawdowns and capped upside during rebounds. Selling calls may also be negatively impacted by rising interest rates, albeit with lesser impact for shorter dated positions. Ultimately for advisors and asset managers, adapting strike selection and timing is key to navigating inflationary periods successfully.
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