Equity income: Balancing yield and growth with BALI

Key takeaways

1. Rising demand for income-oriented ETFs: Investors are looking beyond traditional bonds, seeking strategies that blend income, risk management, and long-term growth potential.
2. Dual income engines: The iShares U.S. Large Cap Premium Income Active ETF (BALI) combines large-cap equities with an options overlay, harvesting equity yield and covered call premiums across cycles.
3. Active balance of yield and growth: By writing index call options and buying S&P 500 futures to help reduce the impact of a potential cap to upside returns, BALI recently had a 9.96% 12-month trailing distribution rate while maintaining a 0.87 one-year beta to the market, helping to provide market exposure.¹

With the Federal Reserve expected to lower rates, investors are increasingly seeking sources of income beyond traditional fixed income. In a landscape marked by shorter cycles and persistent macro uncertainty, many investors — especially those looking to maintain their desired lifestyle through retirement — are searching for ETF strategies that can potentially combine steady cash flow, prudent risk management, and durable participation in equity growth. Reflecting this trend, option‑income ETFs have attracted substantial assets in recent years as allocators seek to expand their income toolkits.²

But not all income strategies are created equally. Covered calls can convert volatility into cash flow, yet they typically sell away part of the upside when markets rise sharply. Without careful construction, the gains from underlying stocks can be offset by lost exposure (often referred to as “delta”) from the call options. The iShares U.S. Large Cap Premium Income Active ETF (BALI) was built to help solve this challenge — offering core holding attributes that allow investors to retain market participation while seeking to enhance income.

Dual income engines: Large cap equity securities + options

BALI seeks to enhance monthly income generation through two sources – a dynamic, rotating basket of U.S. large cap stocks with attractive near-term income potential and option premiums from selling call options on the S&P 500 index.

1.Targeting diversified U.S. large cap stock opportunities

Equity markets have repeatedly experienced concentration among mega-cap leaders, complicating the task of maximizing income without drifting into persistent value or high-yield tilts. BALI’s equity allocation aims to be style-neutral by design.

Figure 1 illustrates how U.S. companies have historically paid dividends each quarter. As seen in the chart, there is variability as to when companies pay a dividend and the amount paid, with more yield observed in the middle of each quarter. Through systematic active management, the fund aims to dynamically identify U.S. large cap stocks with attractive near-term income potential while minimizing sector and single company name tilts. The goal is to harvest income across a broad opportunity set without locking into a static factor exposure.

2. Tapping into options premiums through index-listed covered calls

BALI seeks to enhance monthly income by writing index-listed call options on the S&P 500. Because option premiums tend to rise alongside implied volatility³, periods of market turbulence can offer richer income opportunities.

Figure 2 highlights how harvested options premiums (shown in the pink) have tended to increase when the VIX (shown in blue) spikes. For example, volatility associated with the macro growth scares in mid-2024 and policy surprises in early-to-mid 2025 created environments where option premiums rose alongside implied volatility.

Striking a balance: Maintaining market exposure with options and futures

The trade-off with covered calls is well known: selling covered calls to receive potentially higher income today, may result in less upside tomorrow as you can give up some or all of the market potential if the market rises sharply. BALI seeks to mitigate this impact by consistently monitoring the option’s performance and buying S&P 500 futures to help offset the adverse impact from the options on market exposure. Critically, futures do not materially impact the option-derived yield, so the strategy can seek both enhanced income and market participation.

Figure 3 shows a hypothetical example of how BALI’s active management approach combines an options strategy and futures overlay aiming to maintain a more consistent market exposure (pink bar) over time. As mentioned, selling call options to source income may reduce the portfolio market exposure (purple bar). However, our Systematic portfolio managers continuously monitor this impact and use listed index futures (blue bar) to help reduce the negative impact from those options. This allows BALI to maintain a more consistent core large cap exposure over time.

Seeking income resilience without sacrificing equity exposure

BALI can be used as a core holding, bringing together three modern levers: style-neutral equity holdings, covered calls, and a futures overlay to pursue both income and market participation. Built and managed by the BlackRock Systematic team, BALI provides a purpose-built architecture for investors seeking income, while still maintaining equity market growth potential. This two-pronged objective is especially critical as investors move from accumulation to decumulation, where the challenge shifts from building wealth to sustaining it. Solutions like BALI are designed with this transition in mind — aiming to provide income resilience without sacrificing equity exposure.