It’s getting tougher to source adequate retirement income, a scenario forcing retirees to consider alternative strategies. Enter the Nationwide Risk-Managed Income ETF (NUSI).
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.
“It’s something that even casual market observers know well: Yields on bonds and cash have been going down, largely unabated, for almost three decades. Just when it seemed they had reached their nadir, payouts have taken another leg down,” writes Morningstar’s Christine Benz. “The yield on the 10-year Treasury was just 0.51% on August 4, its lowest level since the equity-market panic back in March. Yields on lower-quality U.S. bonds spiked during the equity-market duress in the first quarter, but they too have drifted back down more recently.”
Favorable Landscape for NUSI
In this backdrop of increased uncertainty and economic weakness due to the coronavirus outbreak, world governments have shown they are willing to do whatever it takes to support growth. Many central banks, including the Federal Reserve, have implemented loose monetary policies to bolster liquidity while governments have opened their checkbooks to fund copious fiscal measures, further stabilizing global equity markets and fueling the quick rebound in stocks. However, the supportive monetary policies have weighed on global rates, and fixed-income investors now face a lower-for-longer yield environment.
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 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.
“In the face of very low yields, I’ve argued that retirement “income” deserves a fundamental rethinking,” notes Benz. “Rather than subsisting on organically generated portfolio income—which today entails jacking up risk to generate a sustainable level of portfolio—retirees should focus instead on ‘cash flows.’ A cash flow approach encompasses income production as well as gain harvesting through rebalancing appreciated positions.”