December 31, 2025
Commentary
2025 in Review
Higher Volatility Regime vs 2024: In line with expectations, 2025 saw a normalization of volatility (average VIX index of 19) from the low levels seen in 2024, to in line with the 10-year average of 18. This higher volatility environment drove an uptick in premiums, offsetting some of the compression in cash yields brought on by BOC rate cuts that weighed on total yield potential for put selling. As a reminder, put selling generates income through a combination of cash yields on short-term money market securities held as collateral against puts sold and options premiums from selling put options.
Strategy Resilience During Significant Market Correction: 2025 saw a major market sell-off in April with a -19% peak to trough decline. Drivers of the sell-off gradually shifted from concerns surrounding AI & Cloud data center demand, a key area of market leadership, to broader economic risks surrounding the negative impacts of tariffs on economic growth. As the more draconian tariff scenarios were walked back, equity markets recovered from the rapid decline, leaving the S&P 500 up just under 18% for the year. During the sell-off, the Ninepoint Target Income Fund provided defensive benefits despite being exposed to increases in volatility, showcasing the ability to weather volatile markets.
Earnings Outpaced Expectations Driving Equity Upside: Our expectation of more normalized US equity market returns driven by mid-high single-digit earnings growth and stable valuations proved to be conservative in 2025. While our expectation that a fed rate cut cycle could, for a time, underpin the loftier equity valuations entering the year occurred, S&P 500 earnings strongly outpaced even the most bullish expectations, with forward earnings increasing ~16% in 2025, driving much of the S&P 500 ~18% total return in our view.
2026 Outlook
Normalized Volatility and the End of Rate Cut Headwinds: We expect the normalized volatility environment of 2025 to continue into 2026, not a repeat of the 2024 lull. We also agree with the Canadian rates market that the BOC rate cut cycle is near its end, supporting a stable to higher cash yield environment. We see put selling yield potential as stable to improving, as volatility is stable to higher and short-term rates declines no longer operate as a headwind.
Moderating Risk Asset Returns Favors Defense: In 2026 we don’t expect the confluence of stable valuations at current lofty levels and above normal earnings growth to play out in favour of outsized gains in risk assets as they did in 2025. There is also precedent for returns of traditional balanced allocations (US-focused) to move towards mid single-digit levels when the S&P 500 is at its current valuation (22X forward PE). In our view, moderating returns for risk assets combined with higher over the cycle yield potential in put selling will improve the trade-off in favour of defensive strategies like the Ninepoint Target Income Fund.
Structurally Improved Income Regime, Long-term Thesis Intact: We continue to believe put selling entered a structurally improved income generating regime post covid that supports a larger allocation within traditional income portfolios. Our view is that a higher cash yield regime combined with stable option premiums will boost the long-term income generating potential of cash covered put selling. Rates stabilization at current levels tracks to our thesis that go forward, short-term rate cycles will operate in a 2-4% range vs the ~1% average during the financial repression of the post GFC period. With cash yields unlikely to fall further and put premiums stable, our thesis of through the cycle income potential of mid to high single digits continues to track. We also expect the defensive benefits of the strategy to become increasingly attractive as risk asset returns moderate.
Colin Watson
Portfolio Manager
Ninepoint Partners
Why Invest in the Ninepoint Target Income Fund?
Moderate Downside Protection
The Ninepoint Target Income Fund utilizes a cash secured put selling strategy to generate income while potentially providing moderate downside protection against market declines.
Accessible
Offered in a low-medium risk rated traditional mutual fund structure with daily liquidity at NAV.
Income Potential & Diversification
Options-based income strategies can offer a competitive yield and may provide diversification to traditional income portfolios during challenging markets.