The Nationwide Risk-Managed Income ETF (NUSI) has a distribution yield of 7.81%, which certainly qualifies as a high-yield territory. Good news: the Nationwide ETF lowers many of the risks associated with higher-yielding assets.
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.
NUSI’s status as an actively managed fund is vital at a time when some investors are blindly taking on unnecessary risk in the hunt for income. Additionally, NUSI is a credible alternative to riskier income-generating strategies.
“High-yield bond funds currently boast an SEC yield of 5.75% on average but have also been subject to lower returns at times,” writes Morningstar analyst Amy Arnott. “The junk-bond market typically suffers during times of economic weakness, such as the bank crisis in 1990 and the global financial crisis in 2007 and 2008. These funds also suffered huge losses in the first quarter of 2020, when the sudden economic shutdown and pandemic-driven uncertainty prompted investors to sell corporate bonds, especially those with weaker credit profiles.”
Keep Risks Low, Income High
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.
A covered call refers to an options strategy where an investor writes or sells a call option on an asset which they already own or bought on a share-for-share basis to generate income via premiums derived from the sale of the call options.
Predictably, NUSI also offers favorable volatility traits relative to common dividend stocks.
“Dividend-paying stocks look better in terms of risk-adjusted returns. They’re traditionally thought of as a safe haven in times of market turbulence, but they haven’t always delivered on that promise. Overall, their volatility has been just a hair below the S&P 500 over the past 15 years, and they actually lost more in the COVID-19 correction in early 2020 as a few high-profile dividend cuts prompted concerns that more would follow,” notes Arnott.