While the technology sector and the tech-heavy Nasdaq-100 Index have reputations for being low-yielding segments, tech is the largest dividend-paying group in dollar terms among domestic sectors.
However, investors can further enhance that income profile while reducing individual equity risk with covered calls. That risk can be further pared by using a fund to do the call writing leg work, such as the Nationwide Risk-Managed Income ETF (NYSEArca: NUSI).
Rather than relying on dividend stocks or interest from bonds, NUSI generates income from covered calls. Covered call strategies such as NUSI can augment a portfolio during periods of heightened volatility. The options allow an investor to hold a long position in an asset while simultaneously writing or selling call options on the same asset. An added benefit of NUSI is that with the fund, investors don’t have to use individual options contracts, which are often expensive with regards to the Nasdaq-100.
“Options cost more when market volatility is high and current options prices still incorporate the very high volatility of the COVID-19 decline in early 2020. For this reason, options are expensive as compared to more normal market conditions,” according to Seeking Alpha.
Examining NUSI Income Strategy
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.
Traders would typically employ a covered-call strategy when they have a neutral view of the markets over the short-term and just gather income from the option premium. While these buy-write ETFs may not produce any phenomenal price returns compared to the broader equities markets, their underlying options strategy generates outsized yields.
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 volatility rises, so too does the size of the premium that can be generated by writing a call option. NUSI presents a single solution for investors looking to incorporate a large-cap covered call strategy, who may otherwise need to accept significant time and expense to operate this strategy individually.
“One benefit for investors when volatility is high is that covered call strategies (also called buy-write strategies) look more attractive,” notes Seeking Alpha. “A buy-write trade involves selling call options against your long holdings, which locks in a certain amount of income. High volatility conditions result in buy-write strategies providing a higher-than-normal level of income. Quite simply, selling a call option against a stock or index fund means that you are selling off the upside potential in return for a specific level of income.”
This article was prepared as part of Nationwide’s paid sponsorship of ETF Trends.
Performance data quoted represents past performance; past performance does not guarantee future results. Index performance is not illustrative of fund performance. One cannot invest directly in an index. Please call 1-877-893-1830 for fund performance.
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NUSI Prospectus (hyperlink to: https://nationwidefunds.onlineprospectus.net/nationwidefunds/NUSI/index.html)
Call 1-800-617-0004 to request a summary prospectus and/or a prospectus. You may also download the prospectus at the link above or by visiting etf.nationwide.com. These prospectuses outline investment objectives, risks, fees, charges and expenses, and other information that you should read and consider carefully before investing.
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: An unmanaged, market capitalization-weighted index of equity securities issued by 100 of the largest non-financial companies, with certain rules capping the influence of the largest components. It is based on exchange, and it is not an index of U.S.-based companies. Market index performance is provided by a third-party source Nationwide Funds Group deems to be reliable (Morningstar). Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses have been reflected. Individuals cannot invest directly in an index.
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