As we consider the state of income investing, investors can turn to innovative exchange traded fund solutions that balance income generation and downside risk mitigation.
In the recent webcast, Redefining Income Generation Through a Risk Mitigation Lens, Mark Hackett, chief of investment research at Nationwide; and Troy Cates, managing director and portfolio manager at Harvest Volatility Management, outlined the challenging climate for investors seeking yield today, such as a combination of broad-based inflation, interest rate hikes, and geopolitical tensions in Eastern Europe that have led to elevated volatility and upended traditional fixed income investments.
The current market environment is facing many headwinds, such as slowing economic and earnings growth, inflation, rising interest/mortgage rates, supply chain, and labor issues, shift in Federal Reserve monetary policy, slowing fiscal support, geopolitical risks, China lockdowns, waning consumer and investor sentiment, and the looming mid-term elections ahead.
Meanwhile, investors have found little solace in the markets as stocks and bonds have taken a beating. On the other hand, commodities have been a lone standout in this environment of rising inflation.
Consequently, income-minded investors looking for ways to generate yields and mitigate further risks can turn to Nationwide’s suite of Risk Managed Income ETF strategies, such as the Nationwide Nasdaq-100 Risk Managed Income ETF (NUSI) that targets high current income with a measure of downside risk protection. NUSI follows 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 may potentially complement traditional equity and fixed income allocations or function as a possible hedge for investors.
The more recently launched Nationwide S&P 500 Risk-Managed ETF (NSPI), the Nationwide Dow Jones Risk-Managed Income ETF (NDJI), and the Nationwide Russell 2000 Risk-Managed Income ETF (NTKI) offer investors the opportunity for a more tactical approach to investing depending on the exposure of each index.
The ETF strategies seek high monthly income levels generated from both the dividends received from equity holdings and premiums from the options collar. Investors will potentially find high monthly income generation, partial downside risk mitigation, reduced duration risk and interest rate sensitivity, and potential capital appreciation from the equity-side participation.
The Nationwide S&P 500 Risk-Managed ETF (NSPI) is an actively managed fund that invests in a portfolio of securities included in the S&P 500 Index™. The S&P 500 Index™ is weighted by market capitalization and comprises approximately 500 of the top U.S.-listed companies that make up the majority of the U.S. equity market cap (80%).
NSPI uses an options collar strategy intended to reduce the fund’s volatility while also seeking to provide some amount of downside protection. A collar strategy involves holding shares of the underlying asset while simultaneously buying protective put options and writing calls for the same security. A put option provides the owner the right to sell the underlying asset at a specific price and on a specific date but does not obligate them to do so. A call option provides its owner the right to buy the asset but does not obligate them to do so.
The Nationwide Dow Jones Risk-Managed Income ETF (NDJI) is an actively managed fund that invests in a portfolio of securities included in the Dow Jones Industrial Average. The Dow Jones is weighted by price and comprises 30 well-established U.S. companies, referred to as blue-chip companies.
NDJI utilizes an options collar strategy as well to seek to reduce the volatility of the fund and provide a measure of downside protection. It also generally uses a “replication” strategy when investing in the Dow Jones.
The Nationwide Russell 2000 Risk-Managed Income ETF (NTKI) is an actively managed fund that invests in a portfolio of securities included in the Russell 2000 Index™. The Russell 2000™ tracks approximately 2,000 U.S. small-cap companies.
NTKI utilizes an options collar strategy as well to seek to reduce the volatility of the fund and provide some amount of downside protection. It also generally uses a “replication” strategy when investing in the Russell 2000, but will switch to a “representative sampling” at the discretion of the sub-advisor and when it is believed to be in the fund’s best interest.
The funds employ a managed distribution program to potentially furnish smooth, relatively consistent distributions to investors. In leveraging a managed distribution program, the funds seek to convert long-run total returns into attractive regular distributions — the magnitude of which are derived based on the historical and expected long-term returns of the funds. Each month, after the funds reset their collar strategy, the funds seek to pay a distribution that may be derived from a combination of options premium, the dividends generated by the underlying equity portfolio, and the appreciation of the fund’s equity holdings.
Financial advisors who are interested in learning more about risk-mitigation strategies can watch the webcast here on demand.
This article was prepared as part of Nationwide’s paid sponsorship of ETF Trends.
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.
Call 1-800-617-0004 to request a summary prospectus and/or a prospectus, or download prospectuses at etf.nationwidefinancial.com. These prospectuses outline investment objectives, risks, fees, charges and expenses, and other information that you should read and consider carefully before investing.
Click this link for the funds’ Standardized performance and 30-day SEC yield.
KEY RISKS: The Nationwide Nasdaq-100® Risk-Managed Income ETF, Nationwide S&P 500® Risk-Managed Income ETF, Nationwide Dow Jones® Risk-Managed Income ETF, and Nationwide Russell 2000® Risk-Managed Income ETF (collectively, the “Risk-Managed Income ETFs”) are 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 Risk-Managed Income ETFs are 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 Risk-Managed Income ETFs may invest in more-aggressive investments such as derivatives (which create investment leverage and illiquidity and are highly volatile). The Risk-Managed Income ETFs employ 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 Risk-Managed Income ETFs’ investment strategy may depend on the effectiveness of the subadviser’s quantitative tools for screening securities and on data provided by third parties. The Risk-Managed Income ETFs expect to invest a portion of their 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 Risk-Managed Income ETFs 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 Risk-Managed Income ETFs and greater tax liabilities for shareholders. The Risk-Managed Income ETFs may concentrate on specific sectors or industries, subjecting them to greater volatility than that of other ETFs. The Risk-Managed Income ETFs 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 Funds’ value and total return. Although the Risk-Managed Income ETFs intend to invest in a variety of securities and instruments, the Risk-Managed Income ETFs will be considered non-diversified.
Additional risks include: Collared options strategy risk, correlation risk, derivatives risk, foreign investment risk, and industry concentration risk.
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: A rules-based, market capitalization-weighted index of the 100 largest, most actively traded U.S. companies listed on the NASDAQ stock exchange. The Index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.
Nasdaq® and the Nasdaq-100® are registered trademarks of Nasdaq, Inc. (which with its affiliates is referred to as the “Corporations”) and are licensed for use by Nationwide Fund Advisors. The Nationwide Nasdaq-100® Risk-Managed Income ETF (“NUSI”) has not been passed on by the Corporations as to their legality or suitability. NUSI is not issued, endorsed, sold, or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE PRODUCT.
S&P 500® Index: An unmanaged, market capitalization-weighted index of 500 stocks of leading large-cap U.S. companies in leading industries; gives a broad look at the U.S. equities market and those companies’ stock price performance.
Duration – a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates. A bond’s duration is easily confused with its term or time to maturity because certain types of duration measurements are also calculated in years.
The S&P 500® index is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”), and has been licensed for use by Nationwide Fund Advisors. Standard & Poor’s®, S&P®, and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Nationwide Fund Advisors. The Nationwide S&P 500® Risk-Managed Income ETF (“NSPI”) is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500® Index.
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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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.