Investors embracing high-yield corporate debt have had their share of volatility this year, which is a reminder that when searching for income, sometimes it pays to look away from junk bonds or high dividend companies that could be under financial duress.
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.
While junk bond downgrades are easing, action on that front earlier this year underscores the utility of NUSI and its low-risk approach in today’s environment.
“Net high-yield downgrades equal the difference between the number of high-yield downgrades and upgrades,” said Moody’s Chief Economist John Lonski in a note out Thursday. “The second-quarter’s declining trend for net high-yield downgrades complements the change in the direction of high-yield credit spreads. In terms of preliminary estimates, the number of U.S. high-yield net downgrades dropped from April 2020’s 214 to May’s 90. A rough extrapolation from recent trends suggests that net high-yield downgrades may ease to 50 in June.”
NUSI Delivers Yield
Junk bonds and high dividend stocks are often prime destinations for income-starved investors, but in aggregate, NUSI trumps both asset classes with a distribution yield of 7.81%. That lofty payout comes with less volatility and more downside protection than traditional high-yield assets.
The Nationwide Risk-Managed Income ETF incorporates options exposure to help generate income and mitigate risk as a way to enhance total returns. Investors have long capitalized on covered call options strategies for income generation or protective put options strategies to protect against and limit losses.
Further spotlighting the advantages of NUSI is that bond markets may not have adequately priced in the aforementioned downgrades.
“The high-yield bond market appears convinced that the worst is over for high-yield credit rating revisions,” said Moody’s Lonski. “The deep decline by net high-yield downgrades from April’s peak of 214 to possibly fewer than 50 in June helps to explain why a composite high-yield bond spread has narrowed from a March 23 high of 1,220 basis points to June 17’s 610 bp.”