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 seek 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 seek to generate income and mitigate risk as a way to enhance total returns. Investors have long used on covered call options strategies for income generation or protective put options strategies to seek to protect against and limit losses, which has been especially important during the recent volatility.
Through the combination of potential income generation and downside protection, NUSI benefits 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 are remaining options premium, the ETF will reinvest in the underlying stocks for potential upside participation.
Fundamentally designed with income generation in mind, NUSI seeks to offer 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.
Any tax or legal information provided is merely a summary of our understanding and interpretation of some of the current income tax regulations and it is not exhaustive. Investors must consult their tax advisor or legal counsel for advice and information concerning their particular situation.
Opinions expressed are subject to change at any time, are not guaranteed, and should not be considered investment advice.
A put is an options contract that gives the owner the right, but not the obligation, to sell a certain amount of the underlying asset, at a set price within a specific time.
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.
Call options are 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.
This article was prepared as part of Nationwide’s paid sponsorship of ETF Trends.
Performance data quoted represents past performance; past performance does not guarantee future results. Index performance is not illustrative of fund performance. One cannot invest directly in an index. Please call 1-877-893-1830 for fund performance.
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.
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Financial advisors who are interested in learning more about retirement income solutions can watch the webcast on demand.