2022 was a year of challenge for advisors and investors, as traditional portfolios were forced to contend with a negative performance from equities and bonds. Retirement portfolios felt the squeeze from inflation and its myriad impacts, the challenge of navigating the positive correlation between stocks and bonds, and the continued and pronounced volatility that sent markets on a rollercoaster ride for much of the year.
Inflation
All of 2022 revolved around one central theme: inflation and its impacts on monetary policy, markets, and the economy. Soaring, persistent inflation caused an aggressive response from the Federal Reserve, with the central bank hiking rates from 0% to an upwards bound of 4.25% in a single year as of the end of November. The aggressive response has set the economy up for the possibilities of recession in 2023 as the Fed continues to fight to bring inflation onto a downward trajectory.
Inflation itself, and the fear and uncertainty it instilled in markets concerned about Fed rate hikes, sent the major equity indexes in the U.S. into bear markets over the course of the year. The S&P 500® Index bottomed out at its lowest down -24.95% for the year on October 10th, the Nasdaq Composite® Index hit its lowest at -34.03% YTD on October 14th, and the Dow Jones Industrial Average® fell to its lowest point of -20.95% YTD on September 30.
Inflation was felt throughout the year but had the largest impact in the fourth quarter’s earnings season when the large forward P/E growth companies largely fell short of expectations and issued grim outlooks for next year. It’s a trend that is likely to continue into 2023, affecting the equity portion of retirement portfolios as the pivot away from growth stocks and to value-oriented ones continues, as well as bonds, while the Fed continues to hike rates.
Image source: Nationwide November Economic & Financial Markets Review
Volatility
With the uncertainty around the inflation narrative for much of the year — the gradual and then rapid shift of language from the Fed from “transitory” to persistent inflation in the first half of 2022, followed by ever-higher inflation “peaks” each month — markets became caught up in a cycle of volatility that has yet to abate.
Fear and uncertainty have driven market responses to each new piece of economic data released: CNN’s Fear & Greed Index (a measurement of seven different market indicators to ascertain investor confidence) bottomed out at 3 (extreme fear) on May 12 and peaked at a greed level of 68 on August 12. Much like the equity markets, the index has oscillated strongly and often between fear and greed, with multiple rapid gains and losses over the year as markets rallied and plummeted in response to monthly economic data reports and FOMC meetings.
2022 was punctuated by some of the strongest single-day rallies of equity indexes since the onset of the pandemic in 2020 and some of the largest single-day drops. It’s a ride that has taken a toll on retirement portfolios, with traditional equity and bond allocations looking to finish the year in the negatives.
Correlation
One of the largest challenges for traditional retirement portfolios this year has been the correlated performance of equities and bonds for much of the year as equities contended with inflation — and the strong U.S. dollar for multinational companies — and bond prices plummeted on rising rates while bond yields (that move inversely to price) soared. (This is a vast oversimplification; the drivers of negative performance are incredibly more nuanced and complex.)
There has been an enormous amount of ink spilled analyzing the correlation between stocks and bonds and whether they are historically negatively or positively correlated overall, but the truth of the last two decades has largely been one of a negatively correlated environment where bonds offered a hedge for equity underperformance.
That changed abruptly this year as inflation took off and interest rates rose, driving equities and bonds into the negatives. It remains to be seen whether the correlation will carry over into 2023 and for how long. The fact remains that the positive correlation of stocks and bonds this year has driven many advisors to seek out alternative sources of income and hedging potentials for retirement portfolios, causing sometimes small and sometimes significant re-allocations for portfolios that have — until this year — remained mostly unchanged in the long equity bull run of at least the last decade.
Image source: Nationwide November Economic & Financial Markets Review
Risk-Managed Opportunities for Retirement Portfolios
The ETF suite from Nationwide is paid out of the ETFs while offering a level of volatility mitigation, allowing advisors to stay invested in the major equity indexes while aiming to provide a measure of downside protection.
The Nationwide Nasdaq-100® Risk-Managed Income ETF (NUSI) is an actively managed fund that follows a rules-based options trading strategy that seeks to generate high current income every month and invests in stocks included in the Nasdaq-100 Index®. The Nasdaq-100 Index® consists of 100 of the largest non-finance securities traded on the Nasdaq exchange and is a rules-based, market capitalization-weighted index.
The Nationwide S&P 500® Risk-Managed ETF (NSPI) is an actively managed fund that follows a rules-based options trading strategy that seeks to generate high current income every month and invests in stocks included in the S&P 500 Index®. The S&P 500 Index® is weighted by market capitalization and comprises approximately 500 of the top U.S.-listed companies that make up the majority of the U.S. equity market cap (80%).
The Nationwide Dow Jones® Risk-Managed Income ETF (NDJI) is an actively managed fund that follows a rules-based options trading strategy that seeks to generate high current income every month and invests in stocks included in the Dow Jones Industrial Average®. The Dow Jones® is weighted by price and comprises 30 well-established U.S. companies, referred to as blue-chip companies.
The Nationwide Russell 2000® Risk-Managed Income ETF (NTKI) is an actively managed fund that follows a rules-based options trading strategy that seeks to generate high current income every month and invests in stocks included in the Russell 2000 Index®. The Russell 2000® tracks approximately 2,000 U.S. small-cap companies.
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.
The NUSI Prospectus may be accessed at: https://nationwidefunds.onlineprospectus.net/nationwidefunds/NUSI/index.html
The NDJI Prospectus may be accessed at: https://nationwidefunds.onlineprospectus.net/nationwidefunds/NDJI/index.php
The NSPI Prospectus may be accessed at: https://nationwidefunds.onlineprospectus.net/nationwidefunds/NSPI/index.php
The NTKI Prospectus may be accessed at: https://nationwidefunds.onlineprospectus.net/nationwidefunds/NTKI/index.php
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.
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. Returns for periods less than one year are not annualized. Short-term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. To obtain the most recent month-end performance, go to etf.nationwidefinancial.com or call 1-877-893-1830.
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, and industry concentration risk.
Price-Earnings Ratio (P/E Ratio) – The ratio of a company’s share price to the company’s earnings per share. The ratio is used for valuing companies and to find out whether they are overvalued or undervalued.
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.
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.
Russell 2000® Index: An unmanaged index that measures the performance of the small-capitalization segment of the U.S. equity universe.
FTSE Russell (“Russell”) is the Index Provider for the Russell 2000® Index (“Russell 2000®” or the “Index”). Russell is not affiliated with the Fund, Nationwide Fund Advisors, the Distributor nor any of their respective affiliates. Nationwide Fund Advisors has entered into a license agreement with Russell to use the Russell 2000®.
The Nationwide Russell 2000® Risk-Managed Income ETF (“NTKI”) has been developed solely by Nationwide Fund Advisors. NTKI is not in any way connected to nor sponsored, endorsed, sold or promoted by the London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). FTSE Russell is a trading name of certain of the LSE Group companies. All rights in the Russell 2000® vest in the relevant LSE Group company which owns the Index. “Russell®” is a trademark of the relevant LSE Group company and is used by any other LSE Group company under license. The Index is calculated by or on behalf of FTSE International Limited or its affiliate, agent or partner. The LSE Group does not accept any liability whatsoever to any person arising out of (a) the use of reliance on or any error in the Index or (b) investment in or operation of NTKI. The LSE Group makes no claim, prediction, warranty nor representation either as to the results to be obtained from NTKI or the suitability of the Index for the purpose to which it is being put by Nationwide Fund Advisors.
Dow Jones Industrial Average®: A price-weighted index composed of 30 “blue-chip” U.S. stocks. The index covers all industries except transportation and utilities, respectively.
The Dow Jones Industrial Average® 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® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones®, Dow Jones Industrial Average®, DJIA® and The Dow® are registered trademarks 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 Dow Jones® Risk-Managed Income ETF (“NDJI”) 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 Dow Jones Industrial Average®.
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.
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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MFM-4953AO, Q-20221207-0535
