It’s been a year of prolonged volatility within U.S. markets, and advisors and investors continue to look for avenues of opportunity in difficult times. A strategy for advisors looking for investment opportunities for their retirement clients may be the Nationwide Nasdaq-100 Risk-Managed Income ETF (NUSI), which seeks high monthly income while offering a measure of downside protection.
NUSI is an actively managed ETF that follows a rules-based options trading strategy that seeks to generate high current income every month and invests in stocks included in the Nasdaq-100 Index. The Nasdaq-100 Index consists of 100 of the largest non-finance securities that trade on the Nasdaq exchange and is a rules-based, market capitalization-weighted index.
It’s also been an index that has been particularly challenged in 2022. While NUSI seeks to generate income, it also seeks to offer a measure of downside protection through an options collar. A collar strategy is a strategy that entails holding shares of underlying security while simultaneously buying protective put options as well as 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 specific price on a specific day. In contrast, a call option gives its owner the right but not the obligation to buy the asset instead.
The options collar is intended to generate added income alongside dividends received for the equity portion of NUSI. This additional income can be generated from writing the call options, with the premiums expected to exceed the costs of purchasing the protective puts.
The options collar also seeks to reduce the fund’s volatility and provide a measure of downside protection. Because the Nasdaq-100 has been dropping in incremental values, the drawdowns have been happening within a range where the collar strategy experiences losses, because the put strike price does not exceed the index value. The value of the put only kicks in when the drawdown of the index is greater than 10% from where the index was when the collar was established.
Nasdaq-100 Performance in 2022 Exceedingly Rare
This type of performance by the Nasdaq-100 where losses were between three to ten percent, has been rare historically, explained Mark Hackett, chief of investment research for Nationwide’s Investment Management Group, in an email to VettaFi.
This type of loss by the Nasdaq-100 has only happened in 69 of the last 438 months (16% of the time). The number of times this pattern has occurred where half of the months were within this range of performance (such as these first months of 2022) has only occurred a total of 16 times in the last 36 years (4%), Hackett detailed in his communication.*
It is also important to note that of the 14 times that the Nasdaq-100 was down more than half of the time in six months, 13 of those times were followed by a positive performance for the next 12 months, averaging returns of 18%.
NUSI offers the potential for reduced volatility for portfolios by seeking to provide a degree of downside protection and mitigation of sharp volatility movements and carries an expense ratio of 0.68%.
For more news, information, and strategy, visit our Retirement Income Channel.
* Data cited as of May 10, 2022. Period cited is 12/1985-5/2022.
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.
The results shown represent past performance; past performance does not guarantee future results. Current performance may be lower or higher than the past performance shown, which does not guarantee future results. Share price, principal value and return will vary, and you may have a gain or a loss when you sell your shares. Returns for periods less than one year are not annualized. Short-term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. To obtain the most recent month-end performance, go to etf.nationwidefinancial.com or call 1-877-893-1830.
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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: 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.
Call options are financial contracts that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity or other asset or instrument at a specified price within a specific time period.
A put is an options contract that gives the owner the right, but not the obligation, to sell a certain amount of the underlying asset, at a set price within a specific time.
Collar – an options trading strategy that is constructed by holding shares of the underlying stock while simultaneously buying protective puts and selling call options against that holding.
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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