Dividend stocks generate income. So do covered calls. For income-hungry investors, both strategies can be deployed within the confines of a single portfolio, and the Nationwide Risk-Managed Income ETF (NYSEArca: NUSI) is the way to do it.
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.
By deploying NUSI alongside a portfolio containing dividend stocks, particularly dividend growers, investors can compound and diversify income streams.
“Writing covered calls against your positions is another way to produce income,” according to Seeking Alpha. “Compounding these two sources of dividends, over time, can lead to strong overall results.”
The NUSI ETF: An Ideal Income Booster
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.
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. NUSI can also help advisors with some important tasks.
“A covered call strategy is a fairly conservative strategy, even more so than simply owning the stock. But it does have risks,” according to Seeking Alpha. “If the price of the stock in question rises higher than the option price (the “strike price”), the owner of the stock will not be able to benefit from this stock appreciation. So, in return for collecting the guaranteed premium for the option, the call writer gives up the potential for the stock upside. Potential is the key. There’s no guarantee the stock will go up. If instead it goes down or stays flat, the writer of the call keeps the premium and the stock.”
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.
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