Protecting Your Stocks in a More Volatile Market
Bond–Covered Call Balanced ETFs: A Way to Wait for Growth Stocks While Earning Income
Stock market volatility has surged in recent months. Concerns over a potential “AI bubble” and uncertainty surrounding interest rate cuts by the U.S. Federal Reserve are key drivers. Beneath the surface lie elevated asset valuations and growing worries about an economic slowdown. Even so, selling flagship stocks such as Nvidia or Palantir is hardly appealing. The continued expansion and adoption of AI technology remains an undeniable long-term trend.
When investing in AI-related stocks, price corrections in global mega-cap names like Nvidia are at least tolerable. Compared with small- and mid-cap stocks, they tend to exhibit lower volatility and greater earnings visibility. Still, if the process of finding a fair valuation drags on amid heightened volatility, patience can wear thin for any investor.
For those seeking long-term exposure to specific stocks while reducing volatility, bond–equity balanced ETFs can be a useful option. These ETFs can broadly be categorized into three types. The first simply combines 30% equities with 70% short-term domestic bonds. Volatility is naturally reduced to roughly 30% of that of a fully invested equity portfolio. However, the bond portion—accounting for 70% of the allocation—offers only modest annual returns of around 2.5%, in line with the benchmark policy rate.
The second approach also allocates 70% to bonds and 30% to equities, but supplements this with the sale of call options on the underlying stocks. For example, by selling weekly out-of-the-money (OTM) call options with a 2% strike, investors can participate in weekly stock gains of up to 2% while earning annual distributions of around 10%. The trade-off is continued downside exposure to the stock and a cap on upside participation.
The third structure combines 30% equities with 70% in U.S. long-term Treasury covered call strategies. Seventy percent of the portfolio is invested in ETFs composed of U.S. Treasuries with maturities of 20 years or longer, while call options are sold on those ETFs to generate annualized distribution yields of around 12%, depending on the product. The equity portion tracks 30% of the price movement of the selected stock. This structure reduces volatility while supporting long-term investment through regular monthly income generated from the bond covered call component.