It’s a conundrum that advisors have faced for decades: how does one generate robust equity income while buffering against downside?
Typically, money managers look to accomplish that objective by way of multiple investment vehicles. Single asset approach, often focus exclusively on bonds. The Nationwide Risk-Managed Income ETF (NYSEArca: NUSI) may be a better mousetrap seeking to solve the income/downside protection scenario.
NUSI, which had $262.5 million in assets under management at the end of the first quarter, is an actively managed exchange traded fund that stands as an income-generating play on the widely followed Nasdaq-100 Index (NDX) – a benchmark not often thought of as a prime income destination owing to its current dividend yield of 0.52% (as of June 4).
(The Nasdaq-100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange.)
However, NUSI, which debuted in December 2019, may offer income investors a refreshed view of generating yield with NDX.
Inside NUSI’s Methodology
To accomplish its objectives of seeking current income and downside protection, NUSI’s managers deploy options strategies. Income is derived via covered call writing.
A covered call, also known as “buy-write,” is an options transaction in which an investor sells options contracts equivalent to the amount of the underlying security he or she owns. For example, an investor looking to generate income from a 500-share position in Amazon (NASDAQ: AMZN) – a stock making up an 8.91% holding for NUSI that doesn’t pay a dividend – can sell up to five calls because each options contract represents 100 shares of the underlying security.
By holding a position in Amazon stock, the investor can deliver the shares if they are called away, which would happen if the options expire in the money. As an actively managed fund, NUSI can potentially limit call away risk.
The downside buffer comes by way of protective puts.
This options strategy involves purchasing long puts on an underlying asset in which the investor holds a long position – in this case NDX. This is a frequently used strategy by professional traders that want to hold long positions in a particular asset while seeking to mitigate against possible downside in that security.
For its part, NUSI potentially offers income investors some compelling benefits. The ETF may be an interesting alternative or complement to bond exposures in 60/40 portfolios. Likewise, because it’s not a fixed income instrument, NUSI could be an avenue for investors looking to mitigate credit and duration risks associated with bonds.
For more on income strategies, visit our Retirement Income Channel.
Protective Put – A risk-management strategy using options contracts that investors employ to guard against the loss of owning a stock or asset.
At The Money (ATM) – A situation where an option’s strike price is identical to the current market price of the underlying security. An ATM option has a delta of ±0.50, positive if it is a call, negative for a put. Both call and put options can be simultaneously ATM.
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.
ETFs, hedge funds, equities, bonds, and other asset classes have different risk profiles, which should be considered when investing. All investments contain risk and may lose value. Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. The Fund’s return may not match or achieve a high degree of correlation with the return of the underlying index.
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.
Nationwide Fund Advisors (NFA) is the registered investment advisor to Nationwide ETFs, which are distributed by Quasar Distributors LLC. NFA is not affiliate with any distributor, subadviser, or index provider contracted by NFA for the Nationwide ETFs.
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