In a previous article, I analyzed a range of ETFs designed to give investors exposure to the "quality" factor, highlighting stocks that showcase robust profitability, strong balance sheets, and consistent revenue growth.
One key takeaway from that exploration was the versatility of the quality factor; it's not confined to a standalone strategy but can be effectively combined with other investment approaches, such as dividend growth.
Taking this concept in a different direction, Natixis Investment Managers has introduced the Natixis Gateway Quality Income ETF (GQI). This innovative ETF marries a quality factor screen for its equity holdings with an actively managed options income overlay.
Since its launch on December 13th, 2023, GQI has witnessed rapid growth, accumulating an impressive $41 million in assets under management by January 2nd, 2024.
Overall, GQI presents an intriguing blend of strategies, reminiscent of some of the most popular and successful ETFs in the market.
It shares similarities with popular and successful funds like the WisdomTree U.S. Quality Dividend Growth Fund (DGRW) and the JPMorgan Equity Premium Income ETF (NYSE:JEPI), combining aspects of quality-focused equity selection with income generation through covered calls.
However, GQI also has some unique attributes worth examining closely on its own. Here's what you need to know as a prospective investor.
GQI: equity selection
The construction of GQI begins with a proprietary multifactor quantitative model designed to screen for high-quality equities. Normally, GQI aims to identify and invest in 75-150 stocks, focusing on three key quality factor metrics:
- High Profitability, Cash Flow Generation, and Earnings Quality: These metrics are crucial as they indicate a company's ability to generate consistent profits and maintain healthy cash flows, both essential for long-term sustainability. Earnings quality reflects the reliability and repeatability of a company's earnings, which is a hallmark of a solid business.
- Efficient Use of Capital: This factor assesses how well a company uses its resources to generate returns. Companies that can efficiently convert their capital into profits tend to be more stable and reliable investments.
- Strong Balance Sheets with Low Leverage: A strong balance sheet, characterized by low levels of debt (low leverage), suggests financial stability and resilience. Companies with robust balance sheets are generally better positioned to weather economic downturns and market volatility.
As of January 2nd, the top 10 holdings in GQI's portfolio represent a plethora of industry leaders with strong fundamentals and in the case of Alphabet (NASDAQ:GOOGL), Visa, and Mastercard, wide economic moats too.
- Apple Inc. (NASDAQ:AAPL) - 7.7%
- Microsoft Corp. (NASDAQ:MSFT) - 4.6%
- Alphabet Inc. Class A (GOOGL) - 4.2%
- Nvidia Corp. (NVDA) - 3.0%
- BNP Paribas (EPA:BNPP) Issuance B.V. - 2.4%
- Canadian Imperial Bank of Commerce (CM (TSX:CM)) - 2.4%
- Morgan Stanley (NYSE:MS) - 2.4%
- UBS AG London Branch - 2.4%
- Visa Inc. Class A (NYSE:V) - 2.3%
- Mastercard Inc. Class A (NYSE:MA) - 2.2%
GQI: options overlay
GQI augments its investment approach with the incorporation of an actively managed options overlay. This strategy is designed to generate attractive levels of monthly income while concurrently lowering volatility, adding a unique dimension to the ETF.
Unlike some covered call ETFs that employ a systematic approach to selling options, GQI's strategy is actively managed. This active management aspect is significant, especially considering Gateway's expertise in options.
An actively managed options strategy allows for more flexibility and responsiveness to market conditions. It enables the fund managers to make strategic decisions about when and how to sell options, potentially optimizing income generation and risk management.
A key feature of GQI's options strategy is its focus on a laddered portfolio of one-month, near-the-money S&P 500 Index call options, sold on a rolling weekly basis. Importantly, the coverage is limited to 50% of GQI’s equity portfolio.
This level of coverage, compared to other covered call ETFs that may sell options on 100% of their holdings, results in less capping of the upside potential. It strikes a balance between income generation through option premiums and maintaining the potential for capital appreciation.
Finally, despite the complexities and active management of its options strategy, GQI maintains a net expense ratio of 0.38%. This rate is only marginally higher than the popular JEPI, which has an expense ratio of 0.35%.
This content was originally published by our partners at ETF Central.