Low interest rates aren’t a retiree’s best friend. Record low borrowing costs brought forth by the Federal Reserve take some of the shine off of asset classes, including government and municipal bonds, once thought of as staples of retirement investing. The Nationwide Risk-Managed Income ETF (NYSEArca: NUSI) can change this conversation for the better.
NUSI is an actively managed portfolio of stocks included in the Nasdaq-100 Index and an options collar. Per index rules, the fund only invests in the top 100 largest by market cap, nonfinancial stocks listed on NASDAQ. A collar strategy involves selling or writing call options and buying put options, thus generating income to hedge some downside risk. The strategy seeks to generate high current income monthly from any dividends received from the underlying stock and the option premiums retained.
“The once standard 60% stock/40% bond retirement allocation has become another casualty of the new investment environment. The amount of income a retiree can expect from the 40% bond/fixed-income allocation can no longer be taken for granted. Investors (and their advisors) are going to need to work hard to create a predictable retirement-income stream,” reports Financial Advisor.
NUSI 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.
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.
“In a low-interest rate backdrop, some investors will undoubtedly consider leaving bonds in search of yield elsewhere. This strategy can have merit and may lead to a deviation from the traditional 60% (equities) / 40% (bonds) composition. It is true that alternative investments are no longer restricted to wealthy investors, pension funds, and endowments. Many investors can now utilize non-correlated assets to potentially satisfy their yearn for yield,” according to Financial Advisor.
As a covered call strategy, NUSI qualifies as a non-correlated asset. However, non-correlated doesn’t mean uncorrelated nor does it mean risk-free.
Fortunately, NUSI offers something many other alternative strategies lack: downside protection to go along with yield.
For more on income strategies, visit our Retirement Income Channel.