Due to the Federal Reserve’s low interest rate policy, advisors and investors are looking for higher yields elsewhere. Junk bonds are a popular destination. Another alternative is the the Nationwide Risk-Managed Income ETF (NYSEArca: NUSI).
NUSI is an actively managed portfolio of stocks included in the Nasdaq-100 Index and an options collar. Per index rules, the fund only invests in the top 100 largest by market cap, nonfinancial stocks listed on NASDAQ. A collar strategy involves selling or writing call options and buying put options, thus generating income to hedge some downside risk. The strategy seeks to generate high current income monthly from any dividends received from the underlying stock and the option premiums retained.
NUSI has added relevance in the current environment, particularly with yields on junk bonds plummeting.
“The high-yield bond market was offering a 4.6% yield at the close of trading Nov. 9, according to ICE BofA Indices. That is a record low,” reports Alexandra Scaggs for Barron’s. “It also reflects a full recovery in market confidence after the pandemic; the gaps between corporate-bond-market yields and yields on comparable Treasuries, a measure of default risk, have returned to lows from February.”
NUSI Better Than Junk
NUSI can act as a complement to traditional equity and fixed income allocations or as the ideal protective hedge for investors with heavy exposure to technology and growth stocks because the fund is a “rules-based options trading strategy that seeks to produce high income using the Nasdaq-100 Index,” according to Nationwide.
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.
“One reason that the move in corporate-bond yields is notable is that it shows the difficulty of earning a safe return during the economic recovery, and even over the past decade. While investors could have locked in higher returns and yields by buying corporate debt during the March selloff, Treasury yields haven’t been above 4.5% since 2006,” according to Barron’s.
In other words, the compensation investors receive for taking on the added risk of junk bonds is dwindling, making NUSI’s still high yield and lower risk strategy all the more appealing.
For more on income strategies, visit our Retirement Income Channel.