Some ETFs offer income while others feature downside protection. The Nationwide Risk-Managed Income ETF (NUSI) offers both of those sought after traits and that’s something to remember if market volatility returns.
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.
The downside protection offered by NUSI is an important consideration when acknowledging that bear markets and big drawdowns are facts of life in equity markets.
“These examples show that market crashes have occurred numerous times throughout the 19th, 20th, and 21st centuries (even before the coronavirus crash). Recognizing their frequency can help provide a better sense of the risks of equity investing according to Morningstar.
NUSI Protective Power
NUSI 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. The March 2020 market swoon highlights the advantages of NUSI.
“In terms of steepness, this year’s initial decline (22.5% between March 9 and March 23) was serious—it roughly matched the initial sell-off during the crash of 1929. The other most severe episodes include the inflationary bear market during Vietnam/Watergate, the second half of the Great Depression/World War II, the Lost Decade, and the World War I/influenza pandemic downturn that I previously mentioned,” according to Morningstar.
NUSI can act as a complement to traditional equity and fixed income allocations or as the ideal protective hedge for investors with heavy exposure to technology and growth stocks because the fund is a “rules-based options trading strategy that seeks to produce high income using the Nasdaq-100 Index,” according to Nationwide.
“Given what this data shows about the regularity of market declines, it’s clear that market risk is about more than volatility. Market risk also includes the possibility of depressed markets and extreme events.
These events can be frightening in the short term, but this analysis shows that for investors who can stay in the market for the long run, equity markets still continue to provide rewards for taking these risks,” notes Morningstar.