With yields on U.S. government bonds low and likely to remain that way for some time, deriving income from safe fixed income assets is all the more challenging. The Nationwide Risk-Managed Income ETF (NUSI) can ease that burden.
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.
NUSI’s robust income stream is derived from covered calls, which are emerging as credible bond alternatives in this low-yield environment.
“One alternative strategy to generate supplemental income from long-horizon portfolios is to sell covered calls on the holdings of structurally long exposures. This takes advantage of implied volatility in option prices exceeding that of subsequently realized volatility on average,” according to S&P Dow Jones Indices.
Embracing NUSI over Low-Yielding Bonds
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.
“When markets begin selling off and increase in volatility, the calls currently being held would have been sold with a strike above the highs, the same as with a normal call writing program,” notes S&P. “But rather than continuing to sell calls on the full portfolio through the (eventual) nadir, the risk control overlay typically reduces exposure, and thus fewer calls are sold, which means less of the eventual upside is called away. As markets rebound, volatility tends to recede, allowing the risk control index to add exposure—and new calls, at higher strikes, to be written.”
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.