Navigating Market Uncertainty for Growth and Income with Covered Calls

[00:04] Tom Sleep:
Good afternoon, everybody. My name is Tom Sleep and I’m Northern Europe Sales Manager at HANetf.

I’m delighted to be joined today by two of our friends from REX Shares. The central theme running through today’s discussion is uncertainty and volatility – how investors might navigate it and potentially mitigate some of its effects.

We’ll start by looking at the US macroeconomic environment, before moving on to artificial intelligence and some of the developments we’re seeing across the technology sector. We’ll then discuss cryptocurrency and finish with some ideas around how investors might approach this period of uncertainty.

Taylor, perhaps we can start with you. One of the questions I’m hearing frequently from investors across Europe relates to volatility. How should investors think about preparing for, or navigating, volatility in the current environment?

[02:32] Taylor Raney:
I would probably lean more towards navigating volatility at this point rather than preparing for it. We’re already seeing it.

At REX Shares, we currently have three covered-call ETFs available within a UCITS wrapper. Two focus on US technology and one focuses on crypto equities and the broader digital-asset ecosystem.

These are highly topical exposures, but they are also important drivers of broader US equity-market performance.

If we look at the US macroeconomic picture today, it is very mixed.

We examined eight different variables across the US economy and, in our view, they don’t point decisively in one direction or another. We’re not here to predict exactly where US equities are heading, but we can reasonably describe the environment as uncertain and volatile.

Economic growth remains positive and PMIs remain in expansionary territory, although GDP growth has moderated.

The labour market has also cooled. Payroll growth has slowed relative to previous averages, although unemployment remains relatively contained.

Consumer spending is still positive but softer, while the savings rate suggests consumers may have less of a cushion than they did in previous years.

Then there is inflation.

Core inflation has moderated, which offers some relief to consumers and investors. But if you look further upstream at producer prices and other cost indicators, there are signs that inflationary pressures have not disappeared completely.

Those costs ultimately have to go somewhere.

One possibility is that companies pass them through to consumers, which could put renewed pressure on consumer inflation. Alternatively, businesses absorb those higher costs themselves, which compresses corporate margins.

Either outcome can influence the broader US economy.

One of the biggest positives we currently see is business investment and capital expenditure.

That leads directly into the AI story.

Investment remains extremely strong, but we also have a restrictive rate environment and parts of the housing market remain under pressure.

So there are many competing variables.

That raises an important question for investors who have enjoyed strong equity-market returns over the past few years: do you take some risk off the table?

If you do that and the AI-driven equity rally continues, you potentially miss further upside.

That is where we think covered-call strategies can be useful.

They allow investors to remain invested in equities while trading some potential future upside in exchange for option premium today.

Within our strategies, we offer both approximately 50% overwrite and 100% overwrite approaches. Depending on an investor’s risk appetite and objectives, that allows them to adjust the balance between potential upside participation and premium generation.

The important question is ultimately: given the volatility and macroeconomic backdrop, how do you want to change the return profile of your existing equity exposure?

[07:46] Tom Sleep:
You mentioned capital expenditure as one of the major positives.

But we’ve recently seen concerns emerge around the spending commitments being made by hyperscalers. Even where companies are reporting strong advertising or cloud revenues, investors are increasingly scrutinising how much they are spending on AI infrastructure.

Could this reliance on capital expenditure eventually become a problem for the hyperscalers or the wider economy?

[08:36] Taylor Raney:
It’s an interesting question because there are so many variables that can change the outlook very quickly.

We have major technology companies reporting earnings within a very short period, alongside important economic data. Enough can happen within 24 or 48 hours to significantly reprice expectations around interest rates, AI and equity markets.

When we look specifically at AI, risks are becoming increasingly company-specific.

You can have very significant moves in individual companies or markets because so much performance has become concentrated around semiconductor and AI-related names.

But that doesn’t necessarily mean there is broad contagion across the entire AI theme.

There has undoubtedly been an extraordinary level of investment in AI.

Looking at the major hyperscalers – Google, Meta, Amazon and Microsoft, for example – capital expenditure forecasts for 2026 and 2027 are materially higher than the already elevated levels of the previous few years.

These companies are putting huge amounts of money to work.

And business investment is generally something you want to see.

The demand for AI also appears to be real. Even within our own business, we’ve seen remarkable improvements in productivity and efficiency from using AI platforms. The capabilities available today are substantially ahead of where they were even six, 12 or 18 months ago.

But the critical question for investors is whether all that additional spending can eventually translate into monetisation and an adequate return on invested capital.

That is one reason we’re seeing higher volatility.

A company can produce strong earnings, but if it simultaneously tells investors that capital expenditure is going to increase substantially, the market may react negatively because investors want evidence that those investments will ultimately generate returns.

The long-term thesis is that AI should produce genuine productivity gains for both businesses and consumers.

But different companies occupy different parts of the AI value chain, and they won’t necessarily react in exactly the same way.

This is important when thinking about FEPI and FEGI, our two US technology strategies.

The portfolios focus on large and liquid US technology companies with significant exposure to the AI ecosystem.

But they are not making one narrow bet on memory chips, photonics or another particular component of the AI value chain.

Instead, investors receive broader technology exposure alongside a covered-call strategy.

We think that can offer a lower-beta way of retaining exposure to the long-term technology story at a time when volatility within individual parts of the AI ecosystem is increasing.

If you compare implied volatility across the broader S&P 500 with the underlying technology names targeted by these strategies, the increase in volatility among those individual companies has been much more substantial.

That reflects how the market currently views AI investment.

If the capital expenditure ultimately translates into significant productivity and earnings growth, the potential upside is considerable.

But if companies fail to monetise that investment effectively, valuations may need to adjust.

For a covered-call strategy, higher implied volatility can also mean higher option premiums.

[14:12] Tom Sleep:
Thanks, Taylor.

Matt, let’s move to cryptocurrency.

Starting from first principles, how do you see the crypto market today from a regulatory and macroeconomic perspective?

[14:58] Matt Gerics:
Recent crypto price action hasn’t been particularly strong, but there are still several developments within the US market that I think are important.

It took roughly a decade for the US to approve a spot Bitcoin ETF.

That illustrates how slowly regulation can move in crypto.

At the same time, we are now seeing institutional investors begin to work out in real time how digital assets should fit within portfolios.

What represents an appropriate allocation? How should it be managed quarter to quarter? How should institutions respond to the volatility?

Investors who have been involved in crypto for a long time become accustomed to significant price swings. But when institutional investors actually begin allocating capital, they experience that volatility first-hand.

We’re therefore seeing institutions gradually become more comfortable with the asset class, but that process is still playing out.

On the regulatory side, there are also significant developments.

The GENIUS Act created a regulatory framework around stablecoins, effectively bringing more traditional financial regulation into that part of the crypto industry.

The CLARITY Act is also important because it seeks to provide clearer rules around regulatory oversight, including the respective roles of the SEC and CFTC, alongside disclosure requirements and rules for exchanges and developers.

These are things the crypto industry has been requesting for years.

Historically, there has been considerable uncertainty about how companies operating in digital assets were expected to comply with rules originally designed for traditional securities markets.

The industry wants clearer regulation.

Progress is occurring, although slowly.

Another important consequence is that regulation could change who ultimately benefits as crypto becomes more integrated into the traditional financial system.

A few years ago, there was a view that Layer 1 blockchains such as Ethereum or Solana might ultimately replace significant parts of existing financial infrastructure.

But clearer rules may also make incumbent financial companies more comfortable participating in digital assets.

Established businesses such as payment networks already have enormous infrastructure and customer bases. As regulation becomes clearer, they can increasingly adopt technologies such as stablecoins rather than necessarily being displaced by them.

It will take time to see how all of this plays out.

Crypto remains an extremely volatile industry.

That is one reason we think an index-based approach to crypto equities can make sense.

Instead of trying to select one winner, investors can gain exposure across different parts of the value chain, including Bitcoin miners, exchanges and payment companies increasingly interacting with digital assets and stablecoins.

We certainly don’t think crypto is dead.

But particularly in the US, further regulatory clarity remains important.

In the meantime, the significant volatility across the sector can also create opportunities for option-income strategies.

[20:00] Tom Sleep:
How politically dependent is this process?

Could a change in the White House, or simply a change in political priorities, derail some of the regulatory progress?

[20:28] Matt Gerics:
Some elements are already moving forward, while others remain uncertain.

The stablecoin framework has passed and is moving towards implementation.

The CLARITY Act, however, remains less certain.

You’ll find people on both sides of the debate – some expecting it to pass and others more sceptical.

From the industry’s perspective, the request is fundamentally for clearer rules: what disclosures are required, how companies should operate and what regulators expect from market participants.

Greater clarity would ultimately be helpful for the industry.

[21:31] Tom Sleep:
We have a question from the audience.

Could the current AI investment cycle develop in a similar way to previous infrastructure booms such as railways or fibre-optic networks?

Are we likely to end up with an oligopoly dominated by a handful of hyperscalers, or could new infrastructure companies emerge and potentially become acquisition targets or future market leaders?

[22:10] Taylor Raney:
It’s very difficult to say that there will be just one, two or three long-term winners.

If you look at the largest companies in the S&P 500 over several decades, market leadership has continually changed.

Concentration has certainly increased in recent years, but the identity of the largest companies still changes over time.

Things now move incredibly quickly.

And AI itself can reduce certain barriers to entry because companies can use AI to build new products and even develop other AI applications.

There will continue to be competition.

That is another reason for the way we designed our technology strategies.

The option-management side is active, but the underlying equity exposure follows a rules-based index methodology.

For FEPI and FEGI, there are 20 underlying constituents.

Eight are core constituents comprising many of the large technology names commonly associated with the hyperscaler and AI themes. The remaining 12 are selected from the largest and most liquid US technology stocks.

The portfolio is rebalanced monthly and reconstituted quarterly.

The aim is to allow the strategy to adapt as leadership changes within the US technology market.

Rather than deciding today which companies will remain the winners indefinitely, the index process can reflect changes in market leadership over time.

[24:39] Tom Sleep:
Let’s turn directly to the strategies.

Could you briefly introduce the three UCITS ETFs and explain why investors might consider them in the current environment?

[25:10] Taylor Raney:
We have three strategies:

• REX Tech Innovation Premium Income UCITS ETF – FEPI
• REX Tech Innovation Income & Growth UCITS ETF – FEGI
• REX Crypto Equity Income & Growth UCITS ETF – CEGI

FEPI and FEGI hold the same underlying basket of technology stocks.

The main difference is the extent of the options overlay.

FEPI: prioritising premium generation

FEPI has approximately a 100% overwrite, meaning the strategy prioritises premium capture and distributions more heavily.

At the time of this discussion, its quoted distribution rate was 26.88%.

That is obviously a very high number.

Broadly speaking, the distributions are supported by option premium generated within the strategy. In some periods, more premium may be collected than is distributed, with the remainder retained within NAV.

FEGI: balancing income and growth

FEGI uses approximately a 50% overwrite.

Its distribution rate at the time of the webinar was around 13.42%.

Because only around half of the portfolio is overwritten, it retains greater participation in potential equity-market upside than the fully overwritten strategy.

CEGI: applying the approach to crypto equities

CEGI also uses approximately a 50% overwrite, but the underlying portfolio consists of crypto-related equities.

Because those stocks tend to exhibit higher volatility, option premiums can also be higher.

At the time of the discussion, CEGI’s distribution rate was approximately 22.3%.

The underlying equity portfolios follow a rules-based approach, with monthly rebalancing and quarterly reconstitution.

The option side is actively but systematically managed.

Generally, we write one-month call options and will typically position the strikes out of the money.

As implied volatility rises, two things can happen.

First, we may be able to collect more premium.

Second, we can potentially write calls further out of the money while still generating an attractive level of premium.

That matters because the further out of the money the call is written, the more potential upside the underlying stock can capture before the option begins limiting additional gains.

The objective is therefore to balance premium generation with upside participation.

There are several ways investors are using these strategies.

1. As a capital-efficient income enhancer

An investor with an income-focused portfolio may not need to allocate a very large percentage to the strategy for the distributions to have a noticeable impact on the portfolio’s weighted-average income.

A smaller allocation may therefore increase overall portfolio income without requiring a substantial reallocation of the risk budget.

2. Lower-beta exposure to growth assets

The strategies can also provide exposure to growth-oriented areas such as technology while potentially reducing some of the upside and downside participation relative to owning the stocks without an options overlay.

3. Diversification beyond traditional dividend payers

Traditional income portfolios can become concentrated in sectors that naturally pay higher dividends.

Covered calls can generate income from sectors such as technology that have historically been more growth-oriented and may not provide high dividend yields.

That potentially allows investors to diversify the sector exposure within an income portfolio.

4. Navigating sideways or volatile markets

If an investor doesn’t know exactly where markets are heading but expects volatility to remain elevated, covered calls can monetise some of that volatility through option premium.

In a relatively flat or sideways market, that premium can contribute positively even when there is limited capital appreciation in the underlying equities.

[29:42] Taylor Raney:
One question we received is whether distributions can offset market declines.

The answer depends heavily on the timeframe.

If an equity market falls 10% or 11% in a single day, the premium from writing calls is not going to compensate completely for that decline.

These strategies still own the underlying equities, so investors remain exposed to downside risk.

However, imagine a more prolonged six- or 12-month bear market where equities gradually decline.

Volatility often rises in those environments, allowing the strategy to potentially collect more premium.

Over time, those accumulated distributions can provide a greater buffer against some of the decline in the underlying assets.

So you have to distinguish between a sudden market shock and a prolonged period of weak or sideways markets.

Another important consideration is the difference between price return and total return.

With a strategy paying substantial distributions, looking only at the ETF’s share price does not provide a complete picture.

Investors also need to account for the distributions they have received.

At the same time, a distribution rate of more than 20% obviously does not mean investors can expect a guaranteed 20%-plus return with an unchanged share price.

If that were possible, there would effectively be no trade-off.

There will naturally be periods where price performance is affected by the path of the underlying assets.

The concept of NAV erosion is particularly important in covered-call strategies.

Imagine a highly volatile technology or crypto-related stock rises 30% in a month.

If you have sold a call option 15% out of the money, the strategy participates in the initial appreciation and receives the option premium, but it does not participate fully in all of the stock’s 30% gain.

Then imagine the stock falls sharply the following month.

The covered-call strategy remains exposed to that downside.

That sequence – limiting part of the upside and then participating in the subsequent downside – can create price deterioration.

That is what we mean when we say that the path of returns matters.

But that is different from simply paying distributions by returning investors’ principal. The aim is for distributions to be funded from the option premiums generated by the strategy.

[33:24] Tom Sleep:
Matt, CEGI has performed strongly during some periods.

But given how much upside can occur within crypto, isn’t it counterintuitive to deliberately cap some of that upside?

[33:54] Matt Gerics:
One component of CEGI’s total return comes from the unusually high level of distributions that can be generated because crypto equities tend to have very high volatility.

Another important consideration is how difficult it is to pick individual winners within crypto.

Take Bitcoin miners as an example.

Some have recently been revalued not simply because of Bitcoin mining itself, but because investors see the potential for their existing infrastructure and computing capacity to be used for AI compute.

That shows how quickly the investment thesis around an individual crypto company can change.

A business that was previously viewed purely as a Bitcoin miner might suddenly be valued partly as AI infrastructure.

That is one reason we think an indexed approach can be useful.

It allows investors to remain diversified across the ecosystem rather than attempting to predict exactly which individual crypto companies will outperform.

Higher volatility can then be monetised through the covered-call component of the strategy.

[35:58] Taylor Raney:
There is one final point that gets to the fundamental reason these strategies were designed this way: the relationship between implied volatility and option premium.

[36:38] Matt Gerics:
When we were developing these products, there were already many covered-call strategies available in the US.

A common structure was to own an entire index and then sell call options on that index.

We wanted to examine the relationship between implied volatility and the premium available from options.

That relationship isn’t linear – it is convex.

For example, consider a hypothetical 30-day call option written 5% out of the money.

At 25% implied volatility, the estimated monthly option yield might be around 1%.

If implied volatility doubles to 50%, the estimated monthly option yield could increase to around 4%.

That helps explain why we focus on higher-volatility individual stocks rather than simply selling options on a broad index.

It can provide more premium.

It can also give us greater flexibility around the strike price.

At lower levels of volatility, moving a call further out of the money can sharply reduce the premium received.

At higher volatility, the reduction in premium can be proportionately smaller.

That can allow the manager to place the call further out of the money, potentially retaining greater upside participation while still collecting a meaningful premium.

[39:10] Taylor Raney:
Ultimately, the environment we’ve been discussing today is highly volatile.

There are a large number of competing factors across the US macroeconomic backdrop, AI, technology and crypto.

These strategies are designed to make use of that volatility.

The intention is to remain invested in equities while converting some potential future upside into option premium today.

Because we offer different levels of coverage, investors can select the balance between potential growth and premium generation that is most appropriate for their objectives and expectations for future markets.

[39:53] Tom Sleep:
Thank you both.

And thank you to everybody who joined us today.

We’ll follow up with further information on the products and the slides discussed during the webinar.

Taylor and Matt, thank you very much for your contributions. It’s been a great discussion.