For retirees, inflation is a scourge, but with the right income-generating ETFs, retirement savers can not only deal with inflation, but they can also vanquish it. Enter the Nationwide Risk-Managed Income ETF (NUSI).
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.
Investors should consider the inflation-fighting power of NUSI today because it’s been so long since inflation was an issue, meaning some investors could be caught off guard when it reappears.
“Although recent years haven’t featured deflation, save for 2009, today’s low-inflation streak is even longer,” writes John Rekenthaler for Morningstar. “Not since 1991 has calendar-year inflation surpassed 4%. Consequently, the market’s inflation expectations, as implied by Treasury yields, are an all-time low. In the early ’40s, payouts on 10-year Treasuries bottomed at just below 2%. That note’s yield is now 0.56%.”
The Nationwide Risk-Managed Income ETF uses an options trading strategy called a protective net-credit collar to generate income. The options strategy sells an upside call option and uses a portion of the proceeds received to buy a put option to hedge downside risk on an underlying portfolio of securities.
On the inflation front, the case for NUSI is building right now.
“Rising national debt no longer seems to trouble bond-fund managers. Those who fussed about such things have been chased out of the business, replaced by pragmatists who cannot explain exactly why what they learned in their macroeconomics classes no longer applies but who knows what happens to investment managers who habitually underperform their peers,” according to Morningstar. “Let economists sort out the theories; fund managers have a job to do and shareholders to satisfy.”
While inflation expectations may remain muted now, investors are already looking into TIPS as a hedge against rising prices ahead. TIPS returns are affected by interest-rate risk as well as changes in the principal value when the Consumer Price Index moves. TIPS will adjust their principal value upward in response to a higher CPI, but the reverse occurs during periods of deflation.
However, TIPS are low-yielding instruments and may rob investors of much-needed income in retirement. Conversely, NUSI is a lower risk, high-yield strategy with dependable income.