With inflation running at 3.7% in September and the Federal Reserve raising rates again at its September meeting, investors seeking income from large-cap dividend stocks may find that passive index funds are no longer enough. That is the argument behind the Infrastructure Capital Equity Income ETF (NYSE: ICAP), which takes an actively managed approach rather than tracking the S&P 500.
Passive, broad-market funds can expose investors to overconcentration risk and capped upside potential, according to the fund's sponsor. They may also lock investors into overvalued large-cap names and fail to adapt when market conditions shift. Income-focused passive funds may not be much better: broad index yields are stuck near lows, rigid rules may fail to protect against inflation, and capping upside limits long-term growth. Even ETFs that layer options on top of a passive strategy can be at a disadvantage if they remain too rigid, such as those that hold an S&P 500 portfolio and sell monthly SPX index call options on 100% of holdings. Such funds may be forced to lock in losses during pullbacks and strictly cap participation in recovery rallies.
ICAP instead selects large-cap, dividend-paying companies from a range of sectors using bottom-up fundamental analysis, so it is not beholden to one stock, sector, industry or region. The portfolio construction emphasizes discounted cash flow estimates along with a dynamic valuation screen that includes metrics such as price-to-earnings, enterprise value-to-EBITDA and price-to-funds-from-operations. Holdings are also chosen for consistent dividends, reasonable payout ratios and the potential for future dividend growth. The fund employs a flexible, discretionary options overlay, selling covered calls on individual stocks with coverage ratios, strike prices and expirations managed dynamically.
The fund is run by Infrastructure Capital Founder, CEO and Portfolio Manager Jay D. Hatfield, who brings nearly thirty years of experience in the financial markets. Hatfield maintains proprietary company models and relationships with management teams to determine earnings estimates and forward-looking outlooks, establishes price targets using a dynamic relative valuation framework, and employs a selective option writing strategy with modest leverage of typically 15-30% to enhance income while retaining upside market exposure. Investors receive either a monthly payout or income that is reinvested.
For investors worried that passive strategies may leave them exposed as rates rise and volatility persists, ICAP's active approach could offer a way to seek income while adapting to changing conditions. Holdings are subject to change, and current top ten holdings can be viewed here. The content was originally published on Benzinga. This post contains sponsored content and was created in collaboration with a third-party partner; it is for informational purposes only and is not intended as investing advice or an offer or solicitation to buy or sell any security.
