In the run up to Election Day, there’s been plenty of chatter regarding potential changes to the tax code and how those alterations could affect retirees. For investors looking to generate income that’s not necessarily politically sensitive, the Nationwide Risk-Managed Income ETF (NUSI) is an exchange traded fund to consider.
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 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.
“A major component within the federal tax code is the preferential income tax rate for qualified dividends and long-term capital gains (that is, gains held for over one year),” according to the Tax Foundation. “Under current law, these sources of capital income are taxed at preferential rates, with a top rate of 23.8 percent when including the net investment income tax (NIIT). Some argue that the preferential rates are unfair, as labor income is taxed at higher levels in our progressive income tax system, up to 37 percent.”
NUSI Skirts Some Thorny Taxes Issues
Conservative investors looking for added yield, dependable income and downside protection, which NUSI offers, are apt to find the Nationwide ETF to be an attractive addition to income-starved portfolios. Additionally, income generated by the fund would be taxed at traditional capital gains rates, not potentially elevated levels that could come about if one party makes sweeping changes to the tax code.
“The preferential tax rates for qualified capital gains and dividends exist in part to mitigate the double taxation of returns to corporate equities, which are taxed once at the firm level at 21 percent before being taxed again when shareholders receive corporate dividends or realize a capital gain,” notes the Tax Foundation.
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.
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