Searching for steady income? We’ve got you covered
Unlock targeted higher income from no-yield or lower-yielding assets
- Pursue predefined higher income in dynamic markets
- Participate in potential future growth
- Reduce relative sensitivity to interest rates
- Available on equities, fixed income, cryptocurrency and commodities
Why invest in Target Income Strategies®?
Targeted high income in dynamic markets
Most income-focused investors require consistent cash flow to meet their expenses or financial goals. However, the yields from income-generating assets, such as bonds, dividend-paying stocks, and real estate, can vary widely due to factors like interest rate changes, market conditions and economic shifts. Target Income Strategies® seek to reduce investors’ exposure to the income gyrations of the markets, by dynamically working under the surface to pursue a steady and consistent level of income. They are dynamic strategies that, when applied on a particular asset, respond to changing market conditions to bridge the gap between income needs and the income that asset yields. The strategy augments income by converting some of the future uncertain growth of the asset into certain upfront income using options.
Get growth with income
In their search for yield, income-focused investors can skew their portfolio away from assets that may produce growth but not (as much) income. Attaching a high weight to an investment’s income properties in deciding how much to hold means:- Missing out on key parts of the economy, such as high-growth technology stocks that don’t pay dividends, or
- Foregoing investments that offer desirable diversifying properties (e.g., commodities such as gold, oil, and agricultural goods) that don’t yield income, or
- Failure to keep pace with inflation
Reduce relative sensitivity to changes in interest rates
Income investors may hold high levels of fixed income in their portfolios to meet their income needs. This may expose them to higher amounts of interest rate risk. During periods of interest rate volatility, investors may see their incomes fall as interest rates fall or may see price depreciation in fixed income positions when interest rates rise. Target Income Strategies® seek to generate income from premiums received from sale of options – which are not meaningfully impacted by interest rates. By deploying a larger allocation from fixed income to Target Income Strategies®, income investors can reduce sensitivity to changes in interest rates.How it works
Covered Call 2.0
Target Income Strategies® are a novel update to the traditional covered call strategy.- Covered call
- A call option is a contract that gives the buyer the legal right but not the obligation to buy shares of the underlying stock or one futures contract at the strike price on the expiration date, in the case of European options. The call option is “covered” if the seller of the call option also owns the underlying security.
The strategy seeks to achieve a targeted level of income and has four key elements
Underlying Asset or asset class
The strategy can be applied on a wide spectrum of assets. Examples include technology stocks, high yield bonds or Gold. Part of the income to achieve the target may come from any income yielded by the underlying assets. Such income could include dividends from stocks or coupons from bonds. Some assets, such as Gold, may yield no income.
Selling Calls
The strategy seeks to generate additional income from selling call options. Call options sold result in the strategy collecting premiums upfront. However, any payouts from settling the calls at their expiry results in a drag on the appreciation in the underlying assets.
- Premiums
- An option premium is the price you receive (if you’re selling an option) or pay (if you’re buying an option) for the rights granted by the option.
Partial Overwrite
Instead of selling calls against the entire underlying positions, the strategy sells calls only against a partial position. The number of calls sold is such that the premiums collected from the call selling and any income collected from the underlying asset together result in meeting the income targets. Selling (or “writing”) calls over a partial position also allows the strategy to participate in potential growth from appreciation in the underlying assets. For a deeper dive on partial vs. full overwrite strategies, click here .
Dynamically adjusted over the short term
Instead of selling longer-dated calls, the strategy sells shorter-dated calls, such as weekly or monthly. Selling calls over the short term has two benefits:
- The strategy collects higher levels of premium by rolling shorter-dated calls than longer-dated calls over the same period.
- The strategy calibrates to changing market conditions more dynamically, allowing it to meet its income target mandate more consistently.
Dynamic balance between growth and income
Target Income Strategies® are designed to provide investors with a pre-defined level of income from a wide range of assets. The strategy seeks to augment income by converting some of the uncertain future growth of an asset into more certain upfront income. The strategy seeks to strike a dynamically changing balance between growth and income, “converting” just the right amount of an asset’s potential growth into income to achieve a predetermined level of income on a consistent basis.
How to invest
Target Income Strategies® can be applied to a wide range of underlying assets. They are currently available on the following underlyings in exchange-traded funds (“ETFs”) and mutual funds for which Vest serves the advisor or subadvisor:
| Dividend & Quality Stocks | Technology Stocks | Alternative Assets | Fixed Income |
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Resources & FAQs
News
Seeking Income by Monetizing Risk with Target Income Strategies®
Investment alternatives, such as equity, fixed income, and commodities, come with embedded income properties. The amount of income they provide varies over time.
Educational paper
Target Income Solutions: Producing Consistent High Income in Dynamic Markets
Target Income Solutions: Producing Consistent High Income in Dynamic Markets
FAQs
What is a call option?
What is a covered call strategy?
What is a partial call option selling strategy?
Why is the partial call strategy key?
To see comparative returns for overwrite strategies ranging from 10% – 100%, read page 8 of Target Income Solutions: Producing Consistent High Income in Dynamic Markets. Why are at-the-money (ATM) options preferred for Target Income Strategies®?
What is the rationale for short-term vs long-dated options for Target Income Strategies®?
Why do short-term options produce greater income than long-term options?
The illustration on the right shows values for hypothetical weekly, monthly and quarterly options using a Black-Scholes calculation that assumes a 1.79% annual dividend yield, 5% annual risk-free rate and 15% annualized volatility. For more on this topic, see pages 10 – 11 of Target Income Solutions: Producing Consistent High Income in Dynamic Markets. 
For more on this topic, see pages 10 – 11 of Target Income Solutions: Producing Consistent High Income in Dynamic Markets. How complex are the Target Income Strategies®?
