Although U.S. interest rates are at historic lows, it could be some time before the Federal Reserve opts to take rates into negative territory. That may never happen, but if it does, investors can turn to the Nationwide Risk-Managed Income ETF (NUSI) for higher levels of income.
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 it stands today, NUSI remains a compelling idea for income-starved investors.
“While the downside risks for the year ahead are increasingly limited, another exogenous shock (or an unforeseen worsening of the one still in play) would be enough to fuel an additional round of monetary stimulus,” notes Nationwide. “The more likely scenario, however, is that negative rates will be a legitimate option at the next turn in the cycle. We are now in an era of monetary policy supercycles, in which accommodative central bank actions in recessions lead to long imbalance-inducing expansions that in turn give way to sharper downturns warranting even more aggressive central bank responses.”
NUSI Takes on Less Low Rate Risk
Rather than relying on dividend stocks or interest from bonds, NUSI generates income from covered calls. Covered call strategies such as NUSI can augment a portfolio during periods of heightened volatility. The options allow an investor to hold a long position in an asset while simultaneously writing or selling call options on the same asset.
“Given the imbalances that are already beginning to build –surging equity and home prices, a budding mismatch between supply and demand in the labor market, etc.– it is easy to imagine another jarring recession and bear market at the end of this expansion, requiring policymakers to break new ground once again in response,” according to Nationwide. “Negative rates are still a longshot in this cycle, but it is not so farfetched to expect them to be on the table in the next one.”
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.
NUSI is an actively managed portfolio of stocks included in the Nasdaq-100 Index. Per index rules, the fund only invests in the top 100 largest (by market cap) non-financial stocks listed on NASDAQ.
For more on income strategies, visit our Retirement Income Channel.