High dividend assets and sectors are often viewed as defensive groups, but in the coronavirus slump of 2020, plenty of previously steady asset classes are betraying historical reputations. This conundrum is putting the spotlight on strategies with strong yields that are also holding up well in a trying environment, including the Nationwide Risk-Managed Income ETF (NYSEArca: NUSI).
The Nationwide Risk-Managed Income ETF incorporates options exposure to seek to generate income and mitigate risk as a way to enhance total returns. Investors have long used covered call options strategies for income generation or protective put options strategies to mitigate against and limit losses. The result is a distribution yield of 7.76%, according to issuer data. (This is non-standard performance which prompts the following: standardized performance, performance narrative, gross expense ratio, 30-day SEC yield.)
In fact, NUSI can act as a complement for income-oriented portfolios or for those looking to generate higher yields from growth investments because the tech-heavy Nasdaq-100 Index serves as the fund’s benchmark with covered call and put buying integrated into the approach.
The points are examined further on the recent webcast, Generating Income and Managing Risk in Today’s Market, Mark Hackett, Chief of Investment Research for Nationwide.
What Say The Data
NUSI’s 7.76% distribution yield also far exceeds the 5.40% average on emerging markets debt and preferred stocks. Again, the Nationwide fund exceeded those groups as those asset classes are down an average of 12.60% since NUSI came to market in December 2019.
For the covered call component, a near-at-the-money to out-of-the-money Nasdaq-100 Index call option is sold, with the intent of generating options premium. For the protective put component, the fund uses a portion of the options premium received to purchase an out-of-the-money Nasdaq-100 Index put option, which seeks to hedge the portfolio below the current market price fully and to mitigate against potential losses in the equity portfolio.
This article was prepared as part of Nationwide’s paid sponsorship of ETF Trends.
Short term performance, in particular is not a good indication of future performance and an investment should not be made based solely on returns.
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.
Distribution Yield – A way of measuring the annual income payments made to unitholders.
Nasdaq-100 Index – A basket of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange.
Basis points (BPS) – refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument.
Near the Money – Refers to an options contract whose strike price is close to the current market price of the corresponding underlying security.
Out The Money (OTM) – An expression used to describe an option contract that only contains extrinsic value. These options will have a delta of less than 50.0. An OTM call option will have a strike price that is higher than the market price of the underlying asset.
Call options – Financial contracts that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity or other asset or instrument at a specified price within a specific time period.
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.
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.
Nationwide Fund Advisors (NFA) is the registered investment advisor to Nationwide ETFs, which are distributed by Quasar Distributors LLC. NFA is not affiliate with any distributor, subadviser, or index provider contracted by NFA for the Nationwide ETFs.
Nationwide, the Nationwide N and Eagle and Nationwide is on your side are service marks of Nationwide Mutual Insurance Company. © 2021 Nationwide
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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.