Equity market valuations usually aren’t retirees’ primary concerns, but elevated multiples bear watching. Investors concerned about that situation can turn to the Nationwide Risk-Managed Income ETF (NYSEArca: NUSI).
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 a result, valuations on broad U.S. market-cap-weighted benchmarks aren’t cheap today. The cyclically adjusted Shiller P/E ratio, for example, recently scraped 32, exactly double its historic median and even higher than it was in the late 1990s,” writes Morningstar’s Christine Benz.
As a covered strategy, NUSI isn’t beholden to valuations and jitters regarding lofty multiples as many pure beta equity funds are.
NUSI: The Recipe for Asset Protection?
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.
“High equity valuations have implications for the asset allocation of in-retirement portfolios, as well as how that asset allocation might change over time,” notes Benz.
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.
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.
“However, lofty equity valuations make a good case for retirees starting out with a lower equity weighting. That’s because sequencing risk is of most concern for new retirees. By starting out with more conservative portfolios, new retirees have a buffer of safe, nonequity assets that they can spend through as retirement progresses,” according to Benz.
For more on income strategies, visit our Retirement Income Channel.