With U.S. interest rates residing at historic lows, income-generating strategies, such as the Nationwide Risk-Managed Income ETF (NUSI), matter even more. That’s likely to be the case for some time, highlighting the viability of NUSI as a core long-term holding for income-starved investors.
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 sports a distribution yield of 7.81%, which is eye-catching in any environment, but particularly so today. That level of income is more relevant when considering it could be years before the Federal Reserve hikes rates again.
“We expect that rates will likely remain at zero for years, as was signaled at the last FOMC meeting. We are leaving our current rate forecasts within our bank models unchanged, which currently project that the first-rate hike will occur in 2023,” writes Morningstar analyst Eric Compton.
NUSI in Focus for the Right Reasons
The Nationwide Risk-Managed Income ETF will use 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.
Covered call strategies 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.
NUSI aims for high monthly income generation, portfolio volatility reduction, reduced duration risk, and interest rate sensitivity, capital appreciation from equity participation, downside risk mitigation, and enhanced tax efficiency of index options.
“Again, there really is no debate that rates ought to be at zero for now, unless you’re in the negative-rate camp, and the Fed has consistently said it is not seriously considering negative rates as a policy tool,” according to Compton.