March 31, 2026
Commentary
2026 Q1 Review
The S&P 500 experienced a ~-8% peak to trough decline brought on by the Iran conflict, driving higher oil prices and raising concerns of second order economic impacts on the global economy. As ceasefire discussions developed, equity markets rallied into the end of the quarter and early April. During the sell-off, the Ninepoint Target Income Fund declined ~70 basis points peak to trough despite being exposed to the increase in implied volatility and equity market downside. Near the apex of the sell-off at March option expiry, the strategy rolled ~20% of the put portfolio, selling 1-year put options that provided higher premiums than history and at strike levels that already incorporated a sell-off. This higher volatility environment has driven an uptick in premiums, offsetting some of the compression in cash yields brought on by BOC rate cuts. 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. Not much has changed relative to expectations in January, in which we envisioned a 2026 with normalized (higher) volatility driving higher potential premiums combined with stable short-term rates, leading to higher total yield potential for put selling. If equity returns continue to moderate in line with our expectations in 2026, we believe the trade-off of potential returns vs risk can increasingly favour defensive strategies like the Ninepoint Target Income Fund.
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.