Income investors are grappling with plenty of challenges in 2021. As if low interest rates across the fixed income universe aren’t bad enough, what income is being earned is being pinched by inflation — a major concern for retirees.
Those scenarios are putting a spotlight on alternative sources of income, including the Nationwide Risk-Managed Income ETF (NYSEArca: NUSI). As of Sept. 30, 2021, the fund exhibited a trailing 12-month distribution yield of 7.65%. (See the factsheet, which has standardized performance and 30-day SEC yield.)
NUSI uses a rules-based options trading strategy that seeks to produce high income and a measure of downside protection using the Nasdaq-100 Index, an index of the 100 largest non-financial stocks on the Nasdaq exchange.
Part of that strategy includes selling covered calls on the Nasdaq-100. Covered calls are income-generating tools that can be important for investors looking to guard portfolios against income erosion caused by inflation.
“Elevated inflation (positive or negative) typically creates market volatility, which leads to higher options prices,” according to Van Hulzen asset management. “This is no secret. In fact, the Volatility Index (VIX) is derived from the options market. We have spent the vast majority of the last 30 years with inflation range-bound between 1-3%. This has kept option prices depressed. But of course, when option prices do rise, you want to be a seller of options – not a buyer of options.”
Taking On A Buy-Write
A covered call, also known as a “buy-write” transaction, is an options transaction in which an investor sells options contracts equivalent to the amount of the underlying security that they own.
For example, an investor looking to generate income from a 500-share position in Company XYZ could sell up to five calls, because each options contract represents 100 shares of the underlying security. (A put option gives its owner the right but not the obligation to sell the underlying asset at a specified price and on a specified date. A call option gives its owner the right but not the obligation to buy that asset instead.)
“Nobody knows what the future holds. But the current momentum appears to indicate that inflation is on the rise, even if only modestly. This will create headwinds in many asset classes, particularly in the fixed income and growth equity categories. But it’s nice to know that this environment may benefit your covered call portfolio,” adds Van Hulzen.
Not only does NUSI generate income that may fight inflation, but it also breaks from the covered call ETF pack by seeking to provide a measure of downside protection using protective puts. In other words, NUSI has some avenues for modest upside should the Nasdaq-100 Index falter.
This options strategy involves purchasing long puts on an underlying asset in which the investor holds a long position — in this case, the Nasdaq-100.
This is a strategy frequently used by professional traders who want to hold long positions in a particular asset while seeking to mitigate against possible downside in that security.
For more news, information, and strategy, visit our Retirement Income Channel.
The results shown represent past performance; past performance does not guarantee future results. Current performance may be lower or higher than the past performance shown, which does not guarantee future results. Share price, principal value, and return will vary, and you may have a gain or a loss when you sell your shares. To obtain the most recent month-end performance, go to etf.nationwide.com or call 800-617-0004.
This article was prepared as part of Nationwide’s paid sponsorship of ETF Trends.
Performance data quoted represents past performance; past performance does not guarantee future results. Index performance is not illustrative of fund performance. One cannot invest directly in an index. Please call 1-877-893-1830 for fund performance.
ETFs, hedge funds, equities, bonds, and other asset classes have different risk profiles, which should be considered when investing. All investments contain risk and may lose value. Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. The Fund’s return may not match or achieve a high degree of correlation with the return of the underlying index.
The NUSI Prospectus may be accessed at: https://nationwidefunds.onlineprospectus.net/nationwidefunds/NUSI/index.html
Call 1-800-617-0004 to request a summary prospectus and/or a prospectus. You may also download the prospectus at the link above or by visiting etf.nationwide.com. These prospectuses outline investment objectives, risks, fees, charges and expenses, and other information that you should read and consider carefully before investing.
KEY RISKS: The Fund is subject to the risks of investing in equity securities, including tracking stock (a class of common stock that “tracks” the performance of a unit or division within a larger company). A tracking stock’s value may decline even if the larger company’s stock increases in value. The Fund is subject to the risks of investing in foreign securities (currency fluctuations, political risks, differences in accounting and limited availability of information, all of which are magnified in emerging markets). The Fund may invest in more-aggressive investments such as derivatives (which create investment leverage and illiquidity and are highly volatile). The Fund employs a collared options strategy (using call and put options is speculative and can lead to losses because of adverse movements in the price or value of the reference asset). The success of the Fund’s investment strategy may depend on the effectiveness of the subadviser’s quantitative tools for screening securities and on data provided by third parties.
The Fund expects to invest a portion of its assets to replicate the holdings of an index. Correlation between Fund performance and index performance may be affected by Fund expenses and because the Fund may not be invested fully in the securities of the index or may hold securities not included in the index. The Fund frequently may buy and sell portfolio securities and other assets to rebalance its exposure to various market sectors. Higher portfolio turnover may result in higher levels of transaction costs paid by the Fund and greater tax liabilities for shareholders. The Fund may concentrate on specific sectors or industries, subjecting it to greater volatility than that of other ETFs. The Fund may hold large positions in a small number of securities, and an increase or decrease in the value of such securities may have a disproportionate impact on the Fund’s value and total return. Although the Fund intends to invest in a variety of securities and instruments, the Fund will be considered nondiversified. Additional Fund risk includes: Collared options strategy risk, correlation risk, derivatives risk, foreign investment risk, and industry concentration risk.
Nasdaq-100 Index: An unmanaged, market capitalization-weighted index of equity securities issued by 100 of the largest non-financial companies, with certain rules capping the influence of the largest components. It is based on exchange, and it is not an index of U.S.-based companies. Market index performance is provided by a third-party source Nationwide Funds Group deems to be reliable (Morningstar). Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses have been reflected. Individuals cannot invest directly in an index.
Covered Call – A financial market transaction in which the seller of call options owns the corresponding amount of the underlying instrument, such as shares of a stock or other securities.
Protective Put: A risk-management strategy using options contracts that investors employ to guard against the loss of owning a stock or asset.
Nationwide Fund Advisors (NFA) is the registered investment advisor to Nationwide ETFs, which are distributed by Quasar Distributors LLC. NFA is not affiliated with any distributor, subadviser, or index provider contracted by NFA for the Nationwide ETFs.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.