Most income ETFs may be light on growth opportunities, but the Nationwide Risk-Managed Income ETF (NYSEArca: NUSI) can positively alter perceptions of the growth/income combination because it benchmarks to the Nasdaq-100 Index (NDX).
The Nationwide Risk-Managed Income ETF incorporates options exposure to help generate income and mitigate risk as a way to enhance total returns. Investors have long capitalized on covered call options strategies for income generation or protective put options strategies to protect against and limit losses.
“Given the acute impact of the Coronavirus crisis on equity valuations so far in 2020, it is worth considering the relative strengths of the Nasdaq-100 compared to the broader US, as well as global, equity markets,” said Mark Mandex, Nasdaq product development specialist, in a recent note. “In addition to highly favorable fundamentals, NDX has demonstrated its superiority to SPX (S&P 500) from a risk perspective, buttressed by its unique mix of sector exposures.”
NUSI Right For These Times
A covered call refers to an options strategy where an investor writes or sells a call option on an asset which they already own or bought on a share-for-share basis to generate income via premiums derived from the sale of the call options. However, the covered call strategy caps upside potential and provides limited downside protection, so it is ideal for investors with a neutral-to-bullish outlook.
NUSI can offer surprising volatility reduction benefits.
“Furthermore, although the Nasdaq-100 had been rightly viewed from its early days as a higher-growth index with concomitantly higher volatility, its observed volatility during this period was often lower than that of SPX. Specifically, from October 24, 2008, thru March 25, 2009, the CBOE Nasdaq-100 Volatility Index (VXN) closed at a level below that of the CBOE S&P 500 Volatility Index (VIX) almost 80% of the time (81 out of 104 trading days),” according to Mandex.
The recent market swings show that the aging bull market rally is susceptible to sudden extreme bouts of volatility. Nevertheless, investors who are worried about further risks may turn to alternative strategies that exhibit lower correlations to traditional assets. This includes ETFs that track buy-write or covered call strategies to generate attractive yields if markets continue to slowdown in the year ahead.
For the covered call component, a near-at-the-money to out-of-the-money Nasdaq-100 Index call option is sold, with the intent of generating options premium. For the protective put component, the strategy uses a portion of the options premium received to purchase an out-of-the-money Nasdaq-100 Index put option, which seeks to fully hedge the portfolio below the current market price and protect against potential losses in the equity portfolio.
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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.