Why we launched our equity income ETF?

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Portfolio managers Tuan Luu and Michael O’Neill, who manage IML’s Equity Income Fund as well as our new active ETF EQIN, talk to Carl McMinn about why we launched the new ETF including:

• Why it targets high income and lower volatility
• Why demand for equity income is growing among retirees
• Why our options trading isn’t as risky as it sounds
• The specifics of how EQIN generates its income

Lightly edited transcript – Recorded on 2 September, 2025

Carl: Hello and welcome to Navigating the Noise, a podcast by Natixis Investment Managers, where we bring you insights from our global collective of experts to help you make better investment decisions. I’m Carl McMinn, and today I’ll be joined by Tuan Luu and Michael O’Neill, portfolio managers of IML’s Equity Income Fund. Mike, Tuan, welcome to the podcast.

Michael and Tuan: Thanks, Carl.

Carl: An exciting time for the Equity Income Fund. We’ve just launched the new ETF; for those playing at home, the ticker is EQIN. What’s the reason for creating the ETF?

Michael: Well, Carl, we’re pretty excited that now investors looking to generate income from equities can access our fund, which has actually been operating since 2011, but now they can do it easily on the market. It’s very important timing, I think, given the wave of money that’s coming into the retirement space, transitioning from accumulation to decumulation. It’s also a time when it’s quite tricky to generate decent income at low risk.

When it comes to equities for income, there really is a dearth of retiree-focused products out there. There’s passive strategies and active strategies might be a bit more systematic in stripping dividends or options income, but they could be higher volatility and turnover. What we’ve brought to market is a little bit different.

Carl: Awesome. The ASX is traditionally known as a great place to get income. Aussie stocks have tended to pay high dividends, but I understand income has been harder to come by recently. Why is that the case?

Tuan: Well, you know, Carl, retail investors have been blessed over the last two years or so. You could get a term deposit of 5%. You had the hybrid market to depend on, and dividends were typically around 5% to 6%, but things have changed drastically over the last two years. The RBA has been cutting rates from 5% down to around 3%, and bank hybrids are also being wound up over the next five or six years.

Meanwhile, dividends in the market have been dropping from around 4.5% down to around 3.7% right now. So yes, it’s certainly a challenge for conservative investors who want to sustain that income and dividends over time without incurring additional risk. We believe this fund is a good option to do so. After all, we’ve been running the same strategy for over 14 years.

Carl: And what type of investors do you think are best suited to the fund? Are you guys invested yourselves?

Michael: Yes, Tuan and I are both invested in the fund. We’re true believers in this strategy, and I’m happy to say this is the only income ETF that I would happily see my parents invested in as well, just because of the profile of high income and low volatility that it delivers.

Carl: What do you see as key risks for retirees and income-facing investors, and how does the Equity Income Fund specifically address these challenges?

Tuan: I think income and return cannot be separated from risk, after all. The idea is that we try to follow the Steggle approach where we want to deliver extra income above the index, to the tune of 2% to 2.5% above the index yield, which translates to an absolute return of 6% to 6.5%, before franking and after fees. At the same time, we want to deliver this at reduced risk. This means about a one-third reduction in terms of volatility. The index volatility is about 12%, and we aim for around 8% or so.

Michael: Just to put that into perspective, retirees do face unique challenges compared to ordinary investors. If you’re a retiree reliant on income from your investments to fund your lifestyle, volatility and the need to draw down at inopportune times can set you back. Because you are not actively contributing to super, it can permanently set you back. So really, this fund is about keeping retirees invested.

Carl: As part of the strategy to get some extra income, the fund does have a conservative options trading strategy. Does that sound a little risky for your mum and dad investors?

Tuan: I don’t think so, Carl. Buy/write and options strategies have been a part of retail strategies for a long time. I did my first buy-write over 25 years ago, and hopefully, I made enough mistakes during that time to protect our current investors. Essentially, we don’t leverage, we don’t speculate, we’re using options in a prudent way to extend naturally what we do from a buy and sell angle.

If we think a stock is approaching full valuation, we’re happy to write a call to extract a bit of income beyond the current share price. For example, Westpac has run up from around $31 to as much as $38. So, what’s wrong with selling a $38 call and picking up another 50 to 75 cents above that?

And also, we write just enough but not too much in terms of preserving the upside potential. For example, if we typically have around 100 stocks we can write options on, we typically use about 40% of our allocation for writing options, retaining 60% to capture any potential upside as well. It’s a prudent way of generating additional income without the speculative or leverage effect.

Carl: So, the fund’s been running for quite some time now, since 2011. How has it performed over these past 14 years, and what lessons have you learned in managing such an income strategy?

Michael: We’ve delivered on our target of a quarterly distribution of at least 2% above the ASX 300 after fees and pre-franking, and importantly, at lower volatility — typically around two-thirds of that of the index.

One of the biggest lessons we’ve learned is don’t strip dividend income for income’s sake. It’s important where you get your dividends from because there are certainly a lot of dividend traps out there. If you’re buying into companies with unsustainably high dividends, debt that needs refinancing, or cyclical or discretionary components to their earnings, you can get stuck. Think about at times the banks, some of the resources stocks, some of the more cyclically exposed sectors.

We try to be a bit more diverse, we target industrial companies, healthcare, and utilities that often have growing cash flows and yield, providing us with more comfort regarding the sustainability of dividends.

Tuan: I think that’s quite important. Generating return and income cannot be separated from risk, which also means diversifying your sources of income. You can’t just focus on REITs or banks. We maintain a quite diversified portfolio based on good businesses across industrials, resources, REITs, and trusts.

We also incorporate an options component to balance things out. For example, during COVID, many companies weren’t able to pay as high dividends, but our diversified approach allowed us to smooth out and continue paying the same sort of level of income, especially during hard times. That’s what we have learned – having that safety buffer is essential, so we are not reliant on any particular source of income at any given time.

Carl: Well, it sounds like you’re trying to reduce risk, keep income high, and collect some franking.

Tuan: Yes, franking has been good Carl. 40% has been our franking average for a little while, in spite of our use of options. This makes franking and after-tax income very important for our clients as well.

Carl: Great. Thanks, Tuan and Mike. Again, equity income, I find it offers a great balance of risk and reward for clients, providing great income along the way. Thank you both for joining us today. It’s been a busy, exciting time for IML. If you’d like to find out more about the Equity Income Fund or the new ETF, EQIN, please visit the IML website. Please tune in again to hear more about the IML team, as well as our other global collective of experts.

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