As we consider ways to better achieve the needs of pre- and post-retirement, investors can look to a risk-managed ETF income strategy.

In the recent webcast, Retirement Income Solutions for Today’s Market, Kristi Rodriguez, Vice President, Nationwide Retirement Institute, Nationwide; Mark Hackett, Chief of Investment Research, Nationwide; and Jonathan Molchan, Managing Director and Portfolio Manager, Harvest Volatility Management, focused on retirement planning in today’s market environment. Fixed-income investors may need to turn to alternative strategies that can better manage downside risk, while still generating the income investors need in retirement.

The strategists pointed out that fear and volatility have settled somewhat, and bond market spreads have narrowed after spiking during the height of the coronavirus pandemic selling. Meanwhile, many investors are still sitting on the sidelines to wait out any further volatile swings as market observers, analysts, and pundits project a wide range of potential market outcomes with no clear indicator for how long this heightened covid-19 awareness will last.

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.

“The steady decline in Treasury yields has made it exceedingly more difficult for investors to generate reliable streams of income from traditional bond investing,” according to Nationwide.

Consequently, investors are increasingly taking on higher risk in search of attractive yields. These alternatives include high dividend stocks, REITs, emerging market debt, high-yield bonds, preferred stock, and MLPs. However, these 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.

As an alternative to these riskier yield-generating investments, Nationwide recently launched the Nationwide Risk-Managed Income ETF (NYSE Arca: NUSI) that uses options-based strategies to help investors target high current income with less risk relative to traditional income-focused investments. It seeks to provide investors with a measure of downside protection with potential upside participation.

The Nationwide Risk-Managed Income ETF incorporates options exposure to help generate income and mitigate risk as a way to enhance total returns. Investors have long capitalized on covered call options strategies for income generation or protective put options strategies to protect against and limit losses, which has been especially important during the recent volatility.

“In the midst of the recent market disruptions, NUSI has maintained a high, stable yield profile, while simultaneously outperforming other popular income-focused investment solutions, since its inception,” according to Nationwide.

“Year-to-date, the downside risk mitigation benefit derived from NUSI’s dynamic collar, specifically the Fund’s constant, fully financed hedge, has generally contributed to a lower level of volatility, relative to other income-oriented investments,” Nationwide added.

For example, NUSI showed a beta of 0.16 as of 29 May 2020, compared to the 0.34 beta for emerging market debt, 0.39 beta for high-yield bonds, 0.49 beta for preferreds, 0.93 beta for high dividend stocks, 0.97 beta for REITs and 1.00 beta for MLPs.

“As market volatility spiked in the midst of the COVID-19 pandemic, NUSI became less correlated to the markets, relative to other income-oriented investments, with a corresponding decline in the Fund’s beta,” according to Nationwide.

Through the combination of income generation and downside protection, NUSI can benefit investors and advisors as it’s a solution that can complement a traditional 60/40 allocation, and it can be used as a bond alternative that can afford investors flexibility across varying market cycles. Also, NUSI can be a volatility dampener that may augment existing allocations as well as a tool that may aid in supplementing current income.

NUSI follows a three-step strategy. First, it fully replicates the constituents of the Nasdaq-100 Index. Secondly, the ETF deploys a rules-based options collar strategy that combines a covered call and a protective put. 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 strategy uses a portion of the options premium received to purchase an out-of-the-money Nasdaq-100 Index put option, which seeks to fully hedge the portfolio below the current market price and protect against potential losses in the equity portfolio.

Finally, a monthly distribution is paid out using a portion of the net-credit generated by the collar. If there is remaining options premium, the ETF will reinvest in the underlying stocks for potential upside participation.

Fundamentally designed with income generation in mind, NUSI offers several benefits that may address the yield enhancement and volatility management needs of investors, including 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.

Financial advisors who are interested in learning more about retirement income solutions can watch the webcast here on demand.