This year brings with it a number of headwinds for U.S. equities and challenges for global markets, as well as continued volatility. For advisors seeking monthly income opportunities within equities with an eye towards volatility mitigation, the Nationwide S&P 500® Risk-Managed Income ETF (NSPI) is worth considering this year.
Predictions for markets this year vary, but the latest forecasts from Goldman Sachs revealed the belief that markets have already peaked for the year as of mid-February, coming on the heels of a rash of disappointing corporate earnings reports.
“A soft landing — and in fact above-trend growth — is already priced in U.S. equities. Valuations are elevated vs. history and will be constrained by an eventual rise in interest rates. Even avoiding recession, earnings are unlikely to grow substantially in 2023,” wrote David Kostin, chief U.S. equity strategist at Goldman Sachs, in a note on February 6.
Wei Li, global chief investment strategist at BlackRock, echoed the sentiment overall and believes markets are currently priced for perfection with little runway to move upwards.
“If we look at market pricing so far this year, it’s not even pricing in a soft landing. It’s pricing in takeoff. It’s pricing inflation to come down. It’s pricing growth to avoid a recession altogether. It’s also pricing in central banks cutting rates starting mid-this year,” Li told Yahoo Finance.
Position for Volatility and Income With NSPI
With challenges facing equities for the remainder of the year and markets potentially susceptible to upset should any of the current predictions and pricing fail to come to fruition, volatility mitigation strategies become increasingly attractive, particularly strategies that seek to deliver monthly income from equities.
NSPI is an actively managed fund that follows a rules-based options trading strategy that seeks to generate high current monthly income and invests in stocks included in the S&P 500® Index. The S&P 500® is weighted by market capitalization and comprises approximately 500 of the top U.S.-listed companies that make up most of the U.S. equity market cap (80%).
While NSPI lagged behind the S&P 500 in price performance in January, it offered a higher distribution yield of 7.04% versus the S&P 500’s 1.62% as of 01/31/23, and has a 30-day SEC yield of 1.06% as of 01/31/23 . NSPI also had noteworthy volatility mitigation with 30-day volatility of 8.22% compared to the S&P 500’s 17.16% as of 01/31/2023. The 30-day volatility calculates the historical volatility of the fund using the standard deviation of the daily gains or losses in each individual trading day for the last 30 days.
NSPI utilizes a collar strategy to seek to provide monthly income while reducing volatility and offering downside protection. A collar strategy entails holding shares of underlying security while simultaneously buying protective put options and writing calls for the same security. A put option gives its owner the right but not the obligation to sell the underlying asset at a specific price on a particular day. In contrast, a call option gives its owner the right but not the obligation to buy the asset instead.
The options collar is intended to reduce the fund’s volatility and provide a measure of downside protection while seeking to generate high monthly income through written calls and dividend payouts from the underlying assets.
As market volatility is anticipated to continue into 2023 and economic uncertainty is likely to extend through the first half of the year, NSPI is a fund to consider that offers exposure to companies that are committed to dividend payouts while also seeking to reduce volatility with a measure of downside protection.
NSPI has an expense ratio of 0.68%.
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This article was prepared as part of Nationwide’s paid sponsorship of ETF Trends.
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The NSPI Prospectus may be accessed at: https://nationwidefunds.onlineprospectus.net/nationwidefunds/NSPI/index.html
Call 1-800-617-0004 to request a summary prospectus and/or a prospectus, or download prospectuses at etf.nationwidefinancial.com. These prospectuses outline investment objectives, risks, fees, charges and expenses, and other information that you should read and consider carefully before investing.
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Click this link for the funds’ Standardized performance and 30-day SEC yield.
KEY RISKS: The Nationwide Nasdaq-100® Risk-Managed Income ETF, Nationwide S&P 500® Risk-Managed Income ETF, Nationwide Dow Jones® Risk-Managed Income ETF, and Nationwide Russell 2000® Risk-Managed Income ETF (collectively, the “Risk-Managed Income ETFs”) are 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 Risk-Managed Income ETFs are 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 Risk-Managed Income ETFs may invest in more-aggressive investments such as derivatives (which create investment leverage and illiquidity and are highly volatile). The Risk-Managed Income ETFs employ 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 Risk-Managed Income ETFs’ investment strategy may depend on the effectiveness of the subadviser’s quantitative tools for screening securities and on data provided by third parties. The Risk-Managed Income ETFs expect to invest a portion of their 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 Risk-Managed Income ETFs 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 Risk-Managed Income ETFs and greater tax liabilities for shareholders. The Risk-Managed Income ETFs may concentrate on specific sectors or industries, subjecting them to greater volatility than that of other ETFs. The Risk-Managed Income ETFs 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 Funds’ value and total return. Although the Risk-Managed Income ETFs intend to invest in a variety of securities and instruments, the Risk-Managed Income ETFs will be considered non-diversified.
Additional risks include: Collared options strategy risk, correlation risk, derivatives risk, foreign investment risk, and industry concentration risk.
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, industry concentration risk, and large capitalization investment risk.
S&P 500® Index: An unmanaged, market capitalization-weighted index of 500 stocks of leading large-cap U.S. companies in leading industries; gives a broad look at the U.S. equities market and those companies’ stock price performance.
The S&P 500® index is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”), and has been licensed for use by Nationwide Fund Advisors. Standard & Poor’s®, S&P®, and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Nationwide Fund Advisors. The Nationwide S&P 500® Risk-Managed Income ETF (“NSPI”) is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500® Index.
Volatility – a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured from either the standard deviation or variance between returns from that same security or market index.
Market index performance is provided by a third-party source Nationwide Funds Group deems to be reliable (Morningstar and U.S. Bank). 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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