Investors craving added income and downside protection – and who isn’t these days? – have some ETFs to mull over, including the Nationwide Risk-Managed Income ETF (NYSE Arca: NUSI).
The Nationwide Risk-Managed Income ETF will use an options trading strategy called a protective net-credit collar to generate income. The options strategy sells an upside call option and uses a portion of the proceeds received to buy a put option to hedge downside risk on an underlying portfolio of securities.
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.
Now For NUSI
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 helped them generate outsized yields.
The recent market swings show that the aging bull market rally is susceptible to sudden extreme bouts of volatility. Nevertheless, investors who are worried about further risks may turn to alternative strategies that exhibit lower correlations to traditional assets. This includes ETFs that track buy-write or covered call strategies to generate attractive yields if markets continue to slowdown in the year ahead.
However, NUSI adds a level of protection not seen in some covered call ETFs by implementing protective put buying. The strategy is working as NUSI is beating the CBOE S&P 500 Zero-Cost Put Spread Collar Index by more than 600 basis points since inception.
As volatility rises, so too does the size of the premium that can be generated by writing a call option, potentially making NUSI an alluring idea in the current environment.
At the end of last year, NUSI had a whopping distribution yield of 7.83% and it pays a monthly dividend, providing investors with a steadier income stream.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.