One of the most important questions retirees must to answer is how to manage their equity and fixed income split. The Nationwide Risk-Managed Income ETF (NYSEArca: NUSI) can help.
NUSI generates superior income relative to many fixed income instruments, but it’s not a dedicated equity strategy, meaning it helps dial back risk. In fact, it offers downside protection.
NUSI can act as a complement to traditional equity and fixed income allocations or as the ideal protective hedge for investors with heavy exposure to technology and growth stocks because the fund is a “rules-based options trading strategy that seeks to produce high income using the Nasdaq-100 Index,” according to Nationwide.
“Yields are quite neatly correlated with future returns over the next decade. Right now, you’re really lucky to earn a return of 1.5% on a diversified bond portfolio,” notes Morningstar analyst Christine Benz. “So, most retirees can’t afford to live with that very low return potential. They need the higher return potential that comes along with stocks and they need to make peace with having the volatility that comes along with stocks.”
NUSI’s Balanced Approach
NUSI is an actively managed portfolio of stocks included in the Nasdaq-100 Index and an options collar. Per index rules, the fund only invests in the top 100 largest by market cap, nonfinancial stocks listed on NASDAQ. A collar strategy involves selling or writing call options and buying put options, thus generating income to hedge some downside risk. The strategy seeks to generate high current income monthly from any dividends received from the underlying stock and the option premiums retained.
Another advantage of NUSI is its downside buffer, a trait rarely seen with income-generating exchange traded funds.
“The big risk is that if you don’t have any buffer assets in your portfolios, if you don’t have any cash or bonds in your portfolio, the risk is that you might encounter some big equity market drawdown, and certainly we have had several over the past couple of decades where stocks lose a lot, and your choices then will be to withdraw from that portfolio,” notes Benz.
Investors have long capitalized on covered call options strategies for income generation, or protective put options strategies to protect against and limit losses.
For more on income strategies, visit our Retirement ETF Channel.