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Consider PAPI to Position a Portfolio Defensively

Inflation picked up pace in February as Tuesday’s consumer price index data came in hotter than expected. In the current environment, many investors may look to position their portfolios more defensively.

The consumer price index climbed 3.2% in February on a year-over-year basis, according to the Bureau of Labor Statistics. This is an increase from the prior month and higher than analyst expectations.

In comparison, prices increased 3.1% year over year in January. On a month-over-month basis, prices climbed 0.4% in February compared to 0.3% the month prior.

The slight tick-up in inflation is likely a troubling sign for the Federal Reserve. Officials have indicated they would like to see more progress on easing price pressures before making any interest rate cuts.

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With continued uncertainty around interest rates and the upcoming election, the stability offered by equity income funds may look particularly attractive right now.

The Parametric Equity Premium Income ETF (PAPI) is a compelling offering in the equity income ETF space. The fund, which is part of Morgan Stanley Investment Management’s ETF lineup, benefits from the firm’s strong history in offering actively managed strategies.

PAPI seeks to provide investors with consistent and sustainable monthly income while maintaining prospects for capital appreciation. The ETF delivers exposure to an actively managed portfolio of U.S. companies that have demonstrated high current income with a systematic call-writing program that seeks to generate additional yield.

The fund aims to do this by investing in dividend payers from the Russell 3000 index. PAPI looks for broad diversification, equal weighting sectors, and then equal weighting the top stocks in each sector.

The active ETF also writes systematic, short-dated out-of-the-money call options in tranches with staggered expiration dates. Those options, which may include FLEX options, help the ETF offer some significant income for its investors.

The equity income ETF’s distribution yield is 6.57% as of February 29, 2024.

For more news, information, and analysis, visit The ETF Yield Channel.

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