The Nationwide Risk-Managed Income ETF (NUSI) is gaining attention as a complement or alternative to traditional fixed income investments within retirement portfolios. Low Treasury yields are just one reason why.
Another reason why investors may want to embrace the steady income and large yield offered by NUSI is what low bond yields imply when it comes to future returns.
“For bonds, there is a strong relationship between the yield at the time of purchase and the subsequent returns,” writes Matthew Bartolini, head of SPDR Americas research. “And this makes sense, as the mathematics behind a bond’s yield equate to the expected cash flows from the coupon as well as any price movement related to trading at a premium (negative return expectation as the bond moves closer to maturity at par) or a discount (positive return expectation as the bond moves closer to maturity at par).”
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.
Understanding the NUSI ETF
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.
As has been frequently noted this year, declining interest rates are boosting the relevancy of NUSI.
“The sizable reduction in today’s interest rates has led to notable duration-induced price appreciation – core Agg bonds are up 7% in 2020– with this historical relationship decoupling,” notes Bartolini. “Yet, this price appreciation will likely dampen potential future returns, as the correlation may mean revert – as it has done historically after prior rolling correlation decouplings during other severe risk events (dot-com and GFC). In fact, the relationship has already started to mean revert.”
NUSI delivers monthly income at a distribution rate of 7.81%, which is well above what investors earn with broad equity benchmarks or safe government debt.
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.
For more on income strategies, visit our Retirement Income Channel.