U.S. government bond yields are anemic. The S&P 500 is awash in dividend cuts, eliminations and suspensions. All of that sounds bad for income investors, but it could be a perfect storm for the Nationwide Risk-Managed Income ETF (NYSEArca: NUSI).

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.

“Income has become hard to come by. That was true before the coronavirus closures happened here in early 2020, and it’s especially true after,” said Morningstar analyst Alex Lucas. “So to give context, the 10-year Treasury’s yield, which had been above 3% briefly in years past, since April, it’s been around 60 basis points to about 80 basis points or so. So, around all-time lows, and it’s not going to beat the historic inflation rate of about 2.2%. Corporate bonds could edge the cost of living, the Bloomberg Barclays U.S. Corporate Bond Index had a 2.7% yield to maturity as of April 30.”

Solving for Income

The Nationwide Risk-Managed Income ETF uses an options trading strategy called a protective net-credit collar to generate income. The options strategy sells an upside call option and uses a portion of the proceeds received to buy a put option to hedge downside risk on an underlying portfolio of securities. These days, NUSI is a superior yield alternative to many fixed income strategies.

“But the problem with bonds, of course, is that their prices could fall if yields rise. And so there’s also some default risk with that, too,” notes Lucas. “So dividend-paying stocks on first blush don’t seem so attractive because there’ve been a number of dividend cuts–by my count from late February through mid-May or so, 240 companies in the U.S., at least 240 companies have cut their dividends, or canceled buyback plans, or suspended their dividends. At least one of those things.”

Covered call strategies can potentially augment a portfolio during periods of heightened volatility. The covered-call options allow an investor to hold a long position in an asset while simultaneously writing, or selling, call options on the same asset.

A protective put is an options strategy where an investor purchases a put option on an asset which they already own or bought on a share-for-share basis to limit potential losses. The protective put will cause profits derived from the strategy to be reduced by the premium paid for the put, but it limits the maximum potential losses.

For more on income strategies, visit our Retirement Income Channel.

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.