The Nationwide Risk-Managed Income ETF (NYSEArca: NUSI) provides not only elevated levels of income, but downside protection, traits explaining the exchange traded fund’s increasing relevance to retirees.
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 is also important in an environment where projecting future returns is increasingly tricky and forecasts don’t always match with reality.
“Then again, all forecasts of investment results are wrong wrong wrong (although I hope not completely pointless),” writes Morningstar’s John Rekenthaler. “If portfolios have 40 possible annual payoffs, ranging from negative 15% to positive 25%, each equally likely (altering the odds doesn’t change the point), then a simulation will match the actual 30-year outcome once in 1048 draws.”
Protect Your Portfolio During Heightened Volatility
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.
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.
Moreover, NUSI can augment income and stabilize volatility in portfolios that are often evenly split between equities and fixed income assets.
“That combination of 6.5% stock returns and 3% bond returns leads to a 4.75% expected return for the 50/50 portfolio,” notes Rekenthaler. “Simulating that forecast, accompanied by a slightly reduced standard deviation of 9.5% (based on the assumption that lower inflation will somewhat tame investment returns) and an implied long-term inflation rate of 1.76%, leads to the following totals.”
For more on income strategies, visit our Retirement Income Channel.