Income-minded investors seeking ways to diversify their portfolios can consider a unique exchange traded fund strategy that seeks to generate income, protect purchasing power, and provide a measure of downside protection.
In the recent webcast, Inflation and Income: How to Protect Your Purchasing Power, Curt Brockelman, Managing Partner & Co-Founder, Harvest Volatility Management; and Ben Ayers, Senior Economist, Nationwide Insurance, explained that investors have relied on steady returns from fixed income investments, but they may find that their real yields are threatened in inflationary environments. Nevertheless, there are strategies that may help limit the negative effects of inflation while simultaneously pursuing the upside.
Looking ahead, after a spike in inflation over 2021, the Consumer Price Index is expected to begin to dissipate, with a projected 2.4% year-over-year change in 2022, which is more in line with the Federal Reserve’s 2% target. Overall, Ayers said in the webcast that Nationwide anticipates long-term rates to be held down by lower policy rates and modest inflation expectations over the mid-term.
As more investors look for ways bolster their income generation in this lower-for-longer yield environment, many have branched out to alternative income options like high dividend stocks, real estate investment trusts, emerging market debt, high yield bonds, fixed rate preferred securities, and master limited partnerships. However, all of these asset categories are susceptible to various types of risk, which can negatively affect their performance.
Alternatively, the Nationwide Risk-Managed Income ETF (NYSEArca: NUSI) seeks to provide current income with downside production.
NUSI uses a rules-based options trading strategy that seeks to produce high income using the Nasdaq-100 Index, an index of the 100 largest non-financial stocks on the Nasdaq exchange. The ETF potentially may act as a complement to traditional equity and fixed income allocations, or as a possible protective hedge for investors.
The fund establishes a collar strategy to generate monthly income. Collar strategies involve holding shares of the underlying stock, while at the same time buying protective put options and writing calls for the same security. (A put option gives its owner the right but not the obligation to sell the underlying asset at a specified price and on a specified date. A call option gives its owner the right but not the obligation to buy that asset instead.)
In the case of NUSI, a near at-the-money (ATM) to out-of-the-money (OTM) Nasdaq-100 index call option is sold, with the intent of generating premium. Using a portion of the premium received, a Nasdaq-100 index put option is purchased in an attempt to protect against potential losses in the underlying equity portfolio. Lastly, a managed distribution is paid to investors each month using a portion of the net-credit generated by the collar. The remaining premium is then reinvested in the fund’s underlying stocks to allow for potential equity participation.
The strategists explained that NUSI can act as a potential complement to a traditional asset allocation strategy. The ETF may act as a complement to a traditional 60/40 allocation, potentially providing investors with greater flexibility across different market cycles and which may act as a diversifier to their portfolios, potentially reducing volatility and correlation compared to traditional investment allocations. It may also act as a tool that to potentially supplement current income.
For more information, please visit the Retirement ETF Channel.
This article was prepared as part of Nationwide’s paid sponsorship of ETF Trends.
Performance data quoted represents past performance; past performance does not guarantee future results. Index performance is not illustrative of fund performance. One cannot invest directly in an index. Please call 1-877-893-1830 for fund performance.
ETFs, hedge funds, equities, bonds, and other asset classes have different risk profiles, which should be considered when investing. All investments contain risk and may lose value. Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. The Fund’s return may not match or achieve a high degree of correlation with the return of the underlying index.
The NUSI Prospectus may be accessed at: https://nationwidefunds.onlineprospectus.net/nationwidefunds/NUSI/index.html
Call 1-800-617-0004 to request a summary prospectus and/or a prospectus. You may also download the prospectus at the link above or by visiting etf.nationwide.com. These prospectuses outline investment objectives, risks, fees, charges and expenses, and other information that you should read and consider carefully before investing.
KEY RISKS: The Fund is subject to the risks of investing in equity securities, including tracking stock (a class of common stock that “tracks” the performance of a unit or division within a larger company). A tracking stock’s value may decline even if the larger company’s stock increases in value. The Fund is subject to the risks of investing in foreign securities (currency fluctuations, political risks, differences in accounting and limited availability of information, all of which are magnified in emerging markets). The Fund may invest in more-aggressive investments such as derivatives (which create investment leverage and illiquidity and are highly volatile). The Fund employs a collared options strategy (using call and put options is speculative and can lead to losses because of adverse movements in the price or value of the reference asset). The success of the Fund’s investment strategy may depend on the effectiveness of the subadviser’s quantitative tools for screening securities and on data provided by third parties. The Fund expects to invest a portion of its assets to replicate the holdings of an index. Correlation between Fund performance and index performance may be affected by Fund expenses and because the Fund may not be invested fully in the securities of the index or may hold securities not included in the index. The Fund frequently may buy and sell portfolio securities and other assets to rebalance its exposure to various market sectors. Higher portfolio turnover may result in higher levels of transaction costs paid by the Fund and greater tax liabilities for shareholders. The Fund may concentrate on specific sectors or industries, subjecting it to greater volatility than that of other ETFs. The Fund may hold large positions in a small number of securities, and an increase or decrease in the value of such securities may have a disproportionate impact on the Fund’s value and total return. Although the Fund intends to invest in a variety of securities and instruments, the Fund will be considered nondiversified. Additional Fund risk includes: Collared options strategy risk, correlation risk, derivatives risk, foreign investment risk, and industry concentration risk.
Nasdaq-100 Index: An unmanaged, market capitalization-weighted index of equity securities issued by 100 of the largest non-financial companies, with certain rules capping the influence of the largest components. It is based on exchange, and it is not an index of U.S.-based companies. Market index performance is provided by a third-party source Nationwide Funds Group deems to be reliable (Morningstar). Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses have been reflected. Individuals cannot invest directly in an index.
Consumer Price Index: The Consumer Price Index (CPI) is a metric calculated by the U.S. Bureau of Labor Statistics measuring the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
At-the-money (ATM): An options contract is said to be “at-the-money” if its strike price, or price at which the option may be exercised, is equal in value to the current market price of the underlying asset.
Out-of-the-money (OTM): An options contract is said to be “out-of-the-money” if it would be worthless, should the contract be exercised today. In the case of a put option, that occurs when the price of the underlying asset is higher than the contract’s strike price. In the case of a call option, that occurs when the price of the underlying asset is lower than the contract’s strike price.
Nationwide Fund Advisors (NFA) is the registered investment advisor to Nationwide ETFs, which are distributed by Quasar Distributors LLC. NFA is not affiliated with any distributor, subadviser, or index provider contracted by NFA for the Nationwide ETFs.
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