Sustaining Income Requires an Optimal Risk Mitigation Strategy

It’s not enough for investors to simply rely on the highest yields to extract maximum income. With so many headwinds aside from inflation buffeting around the markets, it’s necessary to get a proper risk mitigation strategy.

Investors are well aware of recession risks that could hit the economy at any time, which could put a damper on income sources such as bonds. Amid a full-blown recession, bonds are ideally a typical safe haven where investors gravitate, so higher bond demand could mean prices rising and, conversely, yields falling.

Given this, fixed income investors must consider obtaining other sources of income generation. While there are plenty of options in the world of exchange traded funds (ETFs), such as dividends, there’s another option with a risk management strategy built into the fund.

Investors looking to generate income while protecting their portfolios against inflation may want to consider the Nationwide Risk-Managed Income ETF (NUSI). The fund employs an active management strategy, providing investors with dynamic exposure to the markets so when conditions change, holdings can also change at the discretion of seasoned portfolio managers.

Downside Protection and Income Generation

NUSI focuses on the Nasdaq 100®, a benchmark of the 100 largest, highest-volume U.S. companies listed on the Nasdaq stock exchange. It’s the index that ideally represents big tech names such as Amazon and Apple.

NUSI primarily employs two options strategies to generate income: selling covered calls and buying protective puts. A covered call, also known as a “buy-write,” is an options transaction in which an investor sells options contracts equivalent to the amount of the underlying security that they own.

Essentially, covered calls are income-generating tools that can be important for investors looking to guard portfolios against the effects of income erosion in a high inflation environment such as now. Relying on a single fixed income source such as bonds won’t be optimal moving forward, given that there are still plenty of unknowns. It’s the common strategy of relying on multiple streams of income as opposed to one.

NUSI offers downside protection using protective puts. This options strategy involves purchasing long puts on an underlying asset in which the investor holds a long position (in the Nasdaq 100®, in the case of this fund).

NUSI takes advantage of a similar strategy commonly used by traders looking to hold long positions in a particular asset while offering a measure of downside protection in that security.

For more news, information, and strategy, visit the Retirement Income Channel.


This article was prepared as part of Nationwide’s paid sponsorship of ETF Trends.

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.

Click here for Fund Details – https://nationwidefinancial.com/products/investments/etfs/fund-details/NUSI

The NUSI Prospectus may be accessed at: https://nationwidefunds.onlineprospectus.net/nationwidefunds/NUSI/index.html

Call 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.

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: A rules-based, market capitalization-weighted index of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. The Index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

Nasdaq® and the Nasdaq-100® are registered trademarks of Nasdaq, Inc. (which with its affiliates is referred to as the “Corporations”) and are licensed for use by Nationwide Fund Advisors. The Nationwide Nasdaq-100® Risk-Managed Income ETF (“NUSI”) has not been passed on by the Corporations as to their legality or suitability. NUSI is not issued, endorsed, sold, or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE PRODUCT.

Covered Call – A financial market transaction in which the seller of call options owns the corresponding amount of the underlying instrument, such as shares of a stock or other securities.

Protective Put: A risk-management strategy using options contracts that investors employ to guard against the loss of owning a stock or asset.

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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