A Close Look at the New Natixis Gateway Quality Income ETF (GQI)

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:

1. 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.
2. 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.
3. 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, Visa, and Mastercard, wide economic moats too.

1. Apple Inc. (AAPL) - 7.7%
2. Microsoft Corp. (MSFT) - 4.6%
3. Alphabet Inc. Class A (GOOGL) - 4.2%
4. Nvidia Corp. (NVDA) - 3.0%
5. BNP Paribas Issuance B.V. - 2.4%
6. Canadian Imperial Bank of Commerce (CM) - 2.4%
7. Morgan Stanley (MS) - 2.4%
8. UBS AG London Branch - 2.4%
9. Visa Inc. Class A (V) - 2.3%
10. Mastercard Inc. Class A (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 0.34%. This rate is marginally lower than the popular JEPI, which has an expense ratio of 0.35%.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.