The retirement income puzzle is increasingly complex, but the Nationwide Risk-Managed Income ETF (NUSI) stands as a clean, simple piece that can boost retirees’ income profiles.
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.
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.
With a steady diet of income and reduced equity risk, NUSI can help retirees with the vexing scenario of withdrawal rates exceeding portfolio performance.
“The canary in the coal mine, so to speak, is the portfolio-withdrawal percentage,” notes Morningstar’s John Rekenthaler. “When that figure increases, the portfolio is doomed, because once the withdrawal percentage crosses the 4% mark, it will not stop climbing, meaning that the portfolio cannot escape eventual bankruptcy. The cycle may take a very long time to play out, but it is unavoidable.”
A Simple Means To Reduced Risk
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.
“The break-even point for portfolios with real withdrawals is the sum of 1) the withdrawal rate and 2) the inflation rate. In this portfolio’s case, that means 6%,” according to Rekenthaler. “That conclusion seems trite. But it did not strike me as obvious when I first approached the topic. The rising portfolio values create a mental illusion, suggesting that all investments that appreciate above the withdrawal rate will succeed indefinitely. All will not, although frequently the shortfalls may occur so far in the future as to be acceptable.”
Covered call strategies such as NUSI can potentially augment a portfolio during periods of heightened volatility. The covered-call options allow an investor to hold a long position in an asset while simultaneously writing, or selling, call options on the same asset.