Clients Near Retirement? Consider A Treasury Options ETF | ETF Trends

Well-informed advisors are now well aware of the yields available in Treasuries, a trend that is not likely to go anyway anytime soon so long as the Fed is raising rates. While the hike this week once again puts the risk of recession into focus, advisors with clients who either are retired or who are close to retirement may want to consider a treasury options ETF like the Nicholas Fixed Income Alternative ETF (FIAX) which uses options to create spreads with a maximum gain and a maximum loss.

The 10-Year Treasury notes issued March 15 currently list a 3.5% yield according to the Treasury, while short-duration Treasuries under a year are offering yields approaching 4.75%, offering a very solid return for an asset that is backed by the U.S. government. Still, according to David Nicholas, president at FIAX’s issuer Nicholas Wealth Management, clients at or nearing retirement are looking for ways to limit losses and get some solid returns following a big selloff in 2022.

That, and the challenge of buying Treasuries for retail-level clients as well as the compounded cost of delivering clients those notes, prompted Nicholas Wealth Management to launch FIAX this past November.

“If you’ve ever tried buying treasuries, but it’s not the easiest thing for retail-level clients to do,” Nicholas said. “You’ve got to have the right CUSIP number, if you want to get dividends or income off of it, good luck because some of them won’t pay dividends until maturity.”

“So okay, go buy a bond ETF. Well, if we do that, we charge our management fee on it, they’re yielding four, if we throw on a 1% or a 1.5% management fee… Now they’re sitting at two and a half or three,” he continued, adding that inflation, too, chips away at those returns.

That’s what led Nicholas and his collaborators on the ETF, including Jay Pestrichelli, CEO of Zega Financial and an experienced options trader according to Nicholas, to craft a fund focused on providing Treasury exposure that adds in options income.

Actively managed, FIAX uses a defined risk option premium strategy, with transactions including either credit or debit spreads simultaneously buying and writing FLEX call and put options. Covered call strategies were popular in 2022, Nicholas explained, but with their yields came volatility from equities exposure. FIAX, meanwhile, is 99% Treasuries right now, which significantly reduces that volatility, using the option spread to provide a premium.

“What we’re doing is each month, we’re doing a quarter percent to a half a percent options trade, where that is our max gain and our max loss,” Nicholas explained.

Adoption for the ETF has been in the RIA space, Nicholas explained, with much of the recent interest coming from clients looking to make their cash work. The treasury options ETF does charge a 95 basis point fee, but that cost is covered by the options income that comes through its active management.

“It’s really that options component to where we say ‘that additional options income, it’s going to pay for your management fee, it’s going to pay for the fund fee,’” he said. “And it’s going to be able to provide the client some additional value over and above the Treasury.”

In closing, Nicholas underscored the value of an active approach to a Treasury options ETF like FIAX, with the Fed’s decisions to either hike, maintain, or cut rates requiring the ability to ably navigate duration as needed. Returning 91 basis points YTD, FIAX may be a strategy to watch for those looking for a different look at Treasuries than the broader, indexed offerings available elsewhere.

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