In a lower-for-longer yield environment with lingering uncertainties, income-starved investors are looking into alternative exchange traded fund strategies to hedge risks and generate some attractive yields.
For example, the Nationwide Risk-Managed Income ETF (NYSEArca: NUSI), which now has $111 million in assets under management, has been an attractive alternative yield-generating play. The ETF shows a 7.88% distribution yield.
In this backdrop of increased uncertainty and economic weakness due to the coronavirus outbreak, world governments have shown they are willing to do whatever it takes to support growth. Many central banks, including the Federal Reserve, have implemented loose monetary policies to bolster liquidity while governments have opened their checkbooks to fund copious fiscal measures, further stabilizing global equity markets and fueling the quick rebound in stocks. However, the supportive monetary policies have weighed on global rates, and fixed-income investors now face a lower-for-longer yield environment.
Consequently, investors are increasingly taking on higher risk in search of attractive yields. However, many alternative income-generating ideas come with risks or tradeoffs, such as interest rate sensitivity as well as risks associated with duration, inflation, commodity exposure, and leverage.
The Nationwide Risk-Managed Income ETF, though, can help investors target high current income with less risk relative to traditional income-focused investments. The fund strategy seeks to provide some downside protection while maintaining upside potential. Harvest Volatility Management sub-advises the fund.
The Nationwide Risk-Managed Income ETF uses 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.
A covered call refers to an options strategy where an investor writes or sells a call option on an asset which they already own or bought on a share-for-share basis to generate income via premiums derived from the sale of the call options.
A protective put is an options strategy where an investor purchases a put option on an asset which they already own or bought on a share-for-share basis to limit potential losses. The protective put will cause profits derived from the strategy to be reduced by the premium paid for the put, but it limits the maximum potential losses.
The ETF will try to achieve high monthly income generation, portfolio volatility reduction, reduced duration risk, and interest rate sensitivity, capital appreciation from equity participation, downside risk mitigation and enhanced tax efficiency of index options.
For more information on dividend-paying strategies, visit our dividend ETFs category.