With income scarce via traditional sources amidst low interest rates, advisors and investors need to look outside the box. The Nationwide Risk-Managed Income ETF (NYSEArca: NUSI) is an example of exchange traded fund that solves the low interest rate riddle.
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.
As has been frequently noted this year, declining interest rates are boosting the relevancy of NUSI.
“It’s hard out there for fixed-income investors, with the 10-year U.S. Treasury yield hovering below 1% through most of 2020, and the front end of the yield curve near zero,” writes Debbie Carlson for The Ticker Tape. “It’s not likely to get better anytime soon, considering Federal Reserve Chair Jerome Powell said at the June 2020 Federal Open Market Committee (FOMC) meeting that the Fed is “not even thinking about thinking about raising rates.”
Pivotal Income with 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.
“Are you a fixed-income investor looking for the best investments for a low-rate environment? You might need to rethink how to generate income and construct a portfolio to get a return that modestly outpaces inflation. That might mean taking on a little more risk,” notes The Ticker Tape.
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.
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.
Covered call strategies such as NUSI 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. However, the strategy isn’t free of risk.
For more on income strategies, visit our Retirement Income Channel.