A relatively in-line inflation print for April did little to reassure markets about the economic path looking ahead. While equity indexes made marginal gains, the looming specter of tariff impacts overshadow an otherwise positive inflation report. Those investors concerned about stagflation and future downturns would do well to consider the Neuberger Berman Option Strategy ETF (NBOS ) for its performance during recent declines.
April’s headline inflation print didn’t bring any surprises, rising just 0.2% month-over-month. Core inflation (excludes food and energy) gained 2.8% compared to last year. What’s more, year-over-year headline inflation hit a four-year low at 2.3%, reported WSJ. In a pre-tariff economy, the inflation print likely would have sent markets surging and created a strong case for rate cuts. However, U.S. tariffs muddle the picture. They create inflationary pressures looking ahead, with the potential to slow economic growth. The volatility of tariffs also create challenges for markets, with rates continuously changing.
Stagflation concerns are growing this year, according to recent comments made by Federal Reserve Chair Jerome Powell. “If the large increases in tariffs that have been announced are sustained, they are likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment.,” Powell said in a press release earlier this month.
Recent pauses to the worst of China tariffs saw markets surge yesterday, but tariffs remain significantly elevated between the two largest economies. It’s also uncertain if the two countries will reach a concrete trade agreement during the 90-pause.
Invest for Stagflation and Periods of Decline With NBOS
An environment of stagflation brings with it a host of unique economic and investing challenges. While there are a number of strategies that address various elements of stagflation, those that protect against equity drawdowns could prove beneficial whether the economy falls into stagflation or simply remains volatile.
The Neuberger Berman Option Strategy ETF (NBOS ) seeks to underwrite equity risk in markets, generating yield from option premiums and underlying collateral holdings. NBOS writes put options on the S&P 500 and other indexes within the family of S&P 500 indexes, and on ETFs. Put options protect the buyer from loss should the underlying asset’s price fall below the strike price of the put. As a put writer, the fund benefits when the put option expires with the underlying price above or at the strike price. When it expires below and the put is exercised, the fund still benefits from the premiums earned.
When tariff volatility and market drawdowns were strongest, NBOS generated consistent outperformance above the benchmark equity index. The put writing strategy trimmed losses in the period between March 1 and May 1 compared to the SPDR S&P 500 ETF Trust (SPY ), according to Y-Charts data.
Alongside options, NBOS also invests in short-term Treasuries as a source of income. This allows investors to harness two sources of returns through a single strategy without increasing their equity beta or credit exposures, or taking on additional interest rate risk.
Outperformance in Flat and Declining Markets
NBOS is expected to outperform in flat or declining markets, while lagging but still capturing some upside in rising markets. The strategy also seeks to increase income potential through options premiums, which benefit from market volatility.
The ETF managers consider overall market volatility, underlying valuations, and risks when writing put options. The aggregative investment exposure of the options written will typically equal 100% of NBOS’ assets. Sometimes that may be greater, but won’t exceed 125%.
NBOS collateralizes its options using a portfolio of laddered, investment-grade bonds, mostly short-term. The fund invests primarily in Treasuries. However, it can invest in government agency bonds, corporate bonds, mortgage- and asset-backed securities, structured notes, and cash or cash equivalents.
In addition to purchasing put options, the fund may invest in or write call options. NBOS carries a net expense ratio of 0.56%.
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