NEW YORK (TheStreet) -- Volatility spiked early this year as investors worried about a potential rate hike. That volatility has been decreasing because, among other reasons, the Federal Reserve is trying to keep investors -- and the market -- relatively calm, said Paul Stewart, portfolio manager of the Gateway Fund. However, he said, interest rates will eventually go higher.
The fund has climbed roughly 4% over the past year, lagging the S&P 500, which has rallied roughly 13% in the past 12 months.
However, the S&P 500 isn't the benchmark for the Gateway Fund, Stewart explained. Rather than being a traditional equities fund, this fund thrives on volatility, mainly by selling upside index call options on stocks.
As volatility increases, so does the price of options, making it more advantageous for those selling upside call options. Increased volatility equals increased cash flow, he said, pointing out that volatility was high in the first quarter, while the S&P 500 climbed less than 1%. That allowed the Gateway Fund to outperform stocks during the quarter.
It's more like a liquid, alternative investment, one that can complement, but not replace, bonds. It tends to do better in volatile environments when stocks may underperform, he said.
While the fund's process of selling upside calls does limit upside to its investments, it ultimately acts as a hedge against a stock market decline or lackluster action.