ETF Trends’ CEO, Tom Lydon, speaks with Nationwide’s senior director of ETFs, Margaret Farquharson, and Harvest Volatility Management’s managing director and portfolio manager, Troy Cates, about the key risks seen in the market this season and what to expect going into 2022.
To start, Lydon asks about advisors’ concerns with chasing yield in a low-yield environment. This is especially relevant when considering signs of inflation and rising rates going into the new year. Farquharson has seen the primacy of income generation and protection grow among advisors. There have been many persistent headwinds regarding income investing, with advisors increasingly turning to alternative asset classes and sources to derive the income need for retirement, among other concerns.
“We’ve seen inflation rise, as of late, and we now have this new Omicron variant,” Farquharson adds. “And they’re anticipating that inflation will really intensify with this new variant, increasing some of these bottlenecks that would boost inflation.”
Additionally, looking at the traditional sources of income across the credit and duration spectrum on the fixed income side, advisors have seen spreads tighten and yields dry up. Similarly, looking at the standard 60/40 portfolio, income derived from the 40 has been seen to really evaporate. This all explains why advisors are really looking to alternative strategies to generate income. “Strategies that realistically may introduce additional risks into their portfolios,” Farquharson notes.
The NUSI Alternative
Talking about alternative income leads to the discussion of the Nationwide Risk-Managed Income ETF (NUSI), which has been a significant contributor when it comes to alternative options for advisors. As Farquharson explains, “When thinking about bringing new products to market, we’re cognizant of the needs of investors and the challenges that they may face. We think the two biggest outcomes that advisors are really looking for, given the environment, were income generation and downside protection. I think that really led to our decision to launch [NUSI] in partnership with Harvest Volatility Management, a leading option-based asset manager.”
As far as how this works, Cates explains that the goal of NUSI was to seek to deliver a high monthly income with a measure of downside protection. After Nationwide reached out, the work was done to develop an options strategy on top of the Nasdaq-100, which involves rolling in a net-credit collar on a monthly basis to bring in income and use that income to provide downside protection.
NUSI Is Doing Its Job
Fast-forwarding to today, with NUSI out doing its job, there’s the expansion of the risk-managed suite that allows similar products with different asset classes. As Farquharson explains, given the challenges that investors may continue to face, Nationwide is committed to providing solutions that seek to generate high current income with a measure of downside protection, thanks to the expansion of the risk-managed income ETF suite.
Farquharson goes on, explaining, “With the addition of solutions that offer exposure to some of the most well-known domestic indexes, investors may now be able to derive the potential income and downside potential benefits that Nationwide has thought to deliver with NUSI, while potentially having greater optionality when addressing the risk-return objectives that underline their overall strategic allocation decisions.”
Cates also notes how using these new indexes may allow the firms to still provide high income and volatility reduction of portfolios while also giving the advisor a choice of where they want to grab their capital appreciation.
For more news, information, and strategy visit our Retirement Income Channel
This article was prepared as part of Nationwide’s paid sponsorship of ETF Trends.
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 Nationwide Risk-Managed Income ETFs are 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 Funds are 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 Funds may invest in more-aggressive investments such as derivatives (which create investment leverage and illiquidity and are highly volatile). The Funds employ 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 Funds’ investment strategy may depend on the effectiveness of the subadviser’s quantitative tools for screening securities and on data provided by third parties.
The Funds expect to invest a portion of their assets to replicate the holdings of an index. Correlation between Fund performance and index performance may be affected by Fund expenses and because the Funds may not be invested fully in the securities of the index or may hold securities not included in the index. The Funds 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 Funds and greater tax liabilities for shareholders. The Funds may concentrate on specific sectors or industries, subjecting it to greater volatility than that of other ETFs. The Funds 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 Funds intend to invest in a variety of securities and instruments, the Funds 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.
Net Credit Collar – when the premiums received are greater than the premiums paid and net debit is when the premiums paid are greater than the premiums received. BEP = Underlying stock purchase price + Net debit.
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