Tariff-driven market whipsaws continue heading into the summer months. For those investors looking to mitigate large-cap volatility while earning income, the Neuberger Berman Option Strategy ETF (NBOS ) is worth consideration.
Fresh threats of U.S. tariffs on the European Union sent stocks plummeting to wrap up a volatile week last week. However, news of a productive phone call over the weekend between President Trump and European Commission President Ursula von der Leyen resulted in a surge in stocks on Monday morning. With each week seemingly bringing new tariff risks and subsequent relief rallies, investors would do well to look to strategies that potentially mitigate ongoing volatility.
NBOS seeks to underwrite equity risk in markets. It does so by generating yield from option premiums as well as its underlying collateral holdings. The strategy has resulted in a smoother ride thus far this year compared to the S&P 500.
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.
NBOS also supplements its income stream through the short-term Treasuries held as collateral. This allows investors to harness two sources of returns through a single strategy. Notably, they’re able to do so without increasing equity beta or credit exposures, or taking on additional interest rate risk.
The fund collateralizes its options using a portfolio of laddered, investment-grade bonds, mostly short-term. NBOS 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.
The ETF managers consider overall market volatility, underlying valuations, and risks when writing put options. The strategy should outperform in flat or declining markets, while lagging but still capturing some upside in rising markets. It also seeks to increase income potential through options premiums, which benefit from market volatility.
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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