Traditional portfolios invest in two fundamental ways. They either loan to a company through the purchase of bonds, or they own a company through the purchase of stocks. However, Neuberger Berman believes a third option exists for portfolios — that of underwriting.
Rory Ewing, portfolio manager and managing director at Neuberger Berman, explained the value of underwriting strategies in a video. entails holding an underlying asset (collateral) while collecting premiums through the use of options.
The Neuberger Berman Option Strategy ETF (NBOS ) is actively managed and seeks risk-efficient returns for investors. Through the fund’s use of equity index options, it may provide a diversified income stream and yield for portfolios. NBOS is worth consideration, given the fund’s distribution rate of 8.74% as of 7/31/24. Distribution rate annualizes the most recent distribution and then divides by NAV as of the end of the last month.
Under the Hood of NBOS' Collateralized Option Strategy
The fund converted from a mutual fund strategy earlier this year. NBOS’ strategy seeks to underwrite equity risk in markets, making it a potential defensive complement to traditional portfolios. Ewing explained that the strategy should outperform in flat and declining equity markets. In rising equity environments, it would lag but still capture some of the upside.
NBOS also offers a number of possible benefits that include increasing portfolio diversification and risk-efficiency. The strategy seeks to increase income potential through options premiums while also benefiting from market volatility. The fund also invests in short-term Treasuries as a source of income.
The fund writes put options on the S&P 500 as well as other indexes within the family of S&P 500 indexes, and on ETFs. Generally considered defensive positions, 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.
The fund 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, though sometimes may be greater without exceeding 125%.
The options are collateralized by the fixed income portfolio the fund invests in. The bond portfolio is laddered and largely comprises investment-grade, short-term bonds. While most of the bonds are Treasuries, the strategy can invest in any duration bonds. These may include from corporations, other government agencies, mortgage- or asset-backed securities, structured notes, or cash/cash equivalents.
The fund may also invest in or write call options as well as purchase put options. NBOS carries a net expense ratio of 0.56%.
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