One of the primary reasons the Nationwide Risk-Managed Income ETF (NYSEArca: NUSI) is proving to be a great idea for income investors this year is the ETF’s relationship with the Nasdaq-100 Index.
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.
With its ties to the Nasdaq-100, NUSI has been immune to dividend cutting in sectors such as energy and real estate. Additionally, rampant dividend offending in the consumer discretionary sector isn’t affecting NUSI because the bulk of the Nasdaq-100’s components from that sectors aren’t dividend payers to begin with.
Another reason to consider NUSI is that the Nasdaq-100 is a basket of the Nasdaq Composite’s non-financial components, meaning there are now bank stocks in the benchmark – an important point at a time when fears are growing that the Federal Reserve may force banks to trim payouts. More clarity on that front will arrive next week.
“The latest salvo came from the Federal Deposit Insurance Corp., which noted earlier this week that first-quarter dividends were nearly twice as high as first-quarter profits. Smaller, more interest-rate-sensitive banks were said to be on the FDIC’s radar,” reports Carleton English for Barron’s.
The specter of bank dividend cuts is obviously ominous, but even more so at a time when interest rates are low – a scenario plaguing banks’ net interest margins. If dividend cuts come to pass in the sector, there’s little reason to embrace the group in a low rate environment. Fortunately, NUSI has investors’ backs with a distribution yield of 7.81%.
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.
By: Josh Silva
Partner, Portfolio Manager
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