With yields on conservative fixed income assets low and credit spreads depressed, some income investors feel as though they have no choice but to consider other income-generating assets.
To that end, it’s probably not surprising that options-based exchange traded fund strategies aren’t just proliferating in number, but capturing more assets as well.
That includes the Nationwide Risk-Managed Income ETF (NYSEArca: NUSI). As of June 30, 2021, the fund exhibited a trailing 12-month yield of 7.66%. (Click this link to see the factsheet, which has standardized performance and 30-day SEC yield.)
NUSI uses a rules-based options trading strategy that seeks to produce high income and downside protection using the Nasdaq-100 Index, an index of the 100 largest non-financial stocks on the Nasdaq exchange.
Income Through Covered Calls
Like many funds in the options-based ETF category, NUSI seeks to generate income via covered call writing.
A covered call, also known as a “buy-write” transaction, is an options transaction in which an investor sells options contracts equivalent to the amount of the underlying security that they own.
For example, an investor looking to generate income from a 500-share position in Company XYZ could sell up to five calls, because each options contract represents 100 shares of the underlying security. (A put option gives its owner the right but not the obligation to sell the underlying asset at a specified price and on a specified date. A call option gives its owner the right but not the obligation to buy that asset instead.)
By holding a position in XYZ 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.
NUSI also breaks from the covered call ETF pack by seeking to provide downside protection using protective puts. In other words, NUSI has some avenues for modest upside should the Nasdaq-100 Index falter.
This options strategy involves purchasing long puts on an underlying asset in which the investor holds a long position — in this case, the Nasdaq-100.
This is a strategy frequently used by professional traders that want to hold long positions in a particular asset while seeking to mitigate against possible downside in that security.
For more on income strategies, visit our Retirement Income Channel.
The results shown represent past performance; past performance does not guarantee future results. Current performance may be lower or higher than the past performance shown, which does not guarantee future results. Share price, principal value, and return will vary, and you may have a gain or a loss when you sell your shares. To obtain the most recent month-end performance, go to etf.nationwide.com or call 800-617-0004.
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.
The NUSI Prospectus may be accessed at: 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.
At-the-money (ATM): An options contract is said to be “at-the-money” if its strike price, or price at which the option may be exercised, is equal in value to the current market price of the underlying asset.
Out-of-the-money (OTM): An options contract is said to be “out-of-the-money” if it would be worthless, should the contract be exercised today. In the case of a put option, that occurs when the price of the underlying asset is higher than the contract’s strike price. In the case of a call option, that occurs when the price of the underlying asset is lower than the contract’s strike price.
Nationwide Fund Advisors (NFA) is the registered investment advisor to Nationwide ETFs, which are distributed by Quasar Distributors LLC. NFA is not affiliated with any distributor, subadviser, or index provider contracted by NFA for the Nationwide ETFs.
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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.