The two themes that dominate conversations between advisors and their retirement-oriented clients are income and safety. In a market ruled by historically low bond yields, income-seeking investors are being driven to products that carry risks which may be difficult to identify or evaluate. Asset managers have responded by developing innovative products that seek to deliver income generation and downside protection. One of those innovative solutions is the Nationwide Risk-Managed Income ETF (ticker: NUSI).
Curt Brockelman is a managing partner and co-founder of Harvest Volatility Management (HVM), where he oversees the firm’s portfolio and operational risk management, with responsibility for the daily management of the firm’s investment and human capital. Prior to founding HVM, from 2003-2008, Mr. Brockelman was chief investment officer and founder of Perch Bay Partners, LLC, a volatility-arbitrage hedge fund that traded index options on global markets. From 1996-2003, Mr. Brockelman was a senior vice president of investments at Smith Barney and co-manager of The Brockelman Group. While at Smith Barney, he was a Directors’ Council member, and grew his group into one of the top revenue producing teams in the firm. Mr. Brockelman holds an A.B. in economics from Duke University.
I recently interviewed Curt.
Tell me more about Harvest Volatility Management and your role there.
Founded in 2008, Harvest Volatility Management is an investment solutions-based asset manager headquartered in New York. Harvest’s partners and employees collectively have decades of experience structuring, advising, and managing derivatives-based strategies. The firm’s strategies, which focus on the delivery of yield enhancement, risk reduction, and absolute returns, are offered in overlays, customized solutions, and investable products, respectively. I am the co-founder of Harvest and a managing partner of the firm.
What is Harvest’s relationship with Nationwide and how did that evolve?
Harvest Volatility Management currently serves as the sub-advisor for NUSI. With the goal of delivering a high current monthly income stream, while potentially mitigating investors’ exposure to the interest rate, duration, and credit risks traditionally associated with fixed income investing, the launch of NUSI in December 2019 further reaffirms Nationwide’s commitment to broadening access to institutional-quality investment solutions as a measure for
delivering on its mission to protect people, businesses, and futures with extraordinary care. Harvest and Nationwide’s partnership has been strong, as demonstrated by the well-coordinated launch and early growth of NUSI.
What are the key market factors that have reshaped how investors approach income generation, particularly within the context of “retirement readiness”?
These days, people, often with help from their advisor, are preparing for retirement and looking for investment vehicles to replace their salary with passive current income streams. Given the current low-rate environment, and the Fed’s recent commitment to keep rates low for the foreseeable future, clients and advisors are challenged to find income replacement investments that can provide current income without taking outsized risks. Additionally, with a weakening dollar, potential inflation or loss of purchasing power over time can become a real issue for retirees on a fixed income. Investors’ needs for current income and a real rate of return led Nationwide and Harvest to develop NUSI as a solution that sought to deliver those outcomes.
The market environment in the wake of the pandemic has led many investors to focus not only on the size of the yield generated by their portfolios, but also on the dependability of that yield in meeting their retirement income and near-term cash dependent needs. What led you to develop NUSI? What is the problem that it seeks to solve for advisors and their clients?
Over the last 15 years, investors have grappled with a tradeoff between yield or income and the risks inherent to many income-oriented investments including interest rate risk, credit risk, duration risk, and embedded leverage risk. In essence, investors could either invest in strategies which potentially generate more yield and carry a relatively riskier profile, or they could invest in solutions with less risky profiles, but which have significantly less yield generating potential. The great financial crisis of 2008 further exposed many of the perils of a sustained low rate environment, the risks investors were forced to take to generate income and yield, and the price they paid by way of losses during the crisis.
To that effect, Nationwide and Harvest developed NUSI with the fundamental goal of providing investors with a solution that seeks to generate the reliable, consistent stream of income needed to address their retirement and near-term cash dependent needs, alongside the added potential benefit of enhanced downside risk mitigation during market selloffs.
Where does NUSI fit in an investor’s portfolio and how should it be used?
The systematic generation of income, in concert with the potential benefits of volatility reduction and downside-risk mitigation, makes NUSI a robust selection for investors seeking to enhance and diversify a core portfolio allocation.
Accordingly, NUSI may be used as a diversifier of allocations to fixed income (including exposures to treasuries, municipals, and credit portfolios) that may aid in increasing yield and reducing duration, credit, and interest rate risk, by employing a more thoughtful approach to navigating uncertainties around interest rate moves, the timing of recessions, and bond price reductions in a yield starved market. Further, NUSI may also be used in a growth and income-focused portfolio to potentially increase current yield/income and to reduce the volatility of the portfolio’s equity exposure.
What differentiates NUSI from other options-based solutions in the marketplace? Specifically, how might the fund improve outcomes relative to other income-oriented strategies?
Options are a risk-transference market, and when using options in a portfolio, investors are usually trading away one risk for another. With NUSI for example, the Fund seeks to provide a consistent monthly distribution, while preserving assets in market drawdowns. The strategy buys or pays premium for puts to protect assets in the midst of a down market, which may help to preserve capital. NUSI also sells covered calls to generate premium and income; however, that sale truncates upside participation in the portfolio.
With that being said, NUSI’s key differentiators are it’s use of a systematic, rules-based methodology that employs specific triggers to tactically trade the call premium written and the Fund’s data-dependent selection of options’ strikes and the real-time management of these positions – an approach that seeks to relevantly position strikes based upon the market environment. This approach may allow NUSI to participate in market rallies, while potentially minimizing exposure to market drawdowns as an additional measure that may aid in generating a strong compounded real return over time.
Can you please describe how the fund’s investment process has contributed to the strength of its performance, particularly amid the market disruptions stemming from the COVID-19 pandemic?
As discussed, NUSI employs a systematic, rules-based approach that effectively eliminates emotional decision-making or discretion from the management process. In essence, the strategy seeks to deliver a measure of downside protection by owning puts, however, there are trigger points which close out positions to capture call premium earned or remove caps on upside return potential.
To that effect, the strategy’s year-to-date performance may be attributed to three key factors: the closure of the short call option during sharp or protracted advances in the equity market, which consequently “uncapped” the fund’s underlying equity portfolio and allowed for additional gains; the downside risk mitigation benefit derived from the fund’s protective put; and the drawdown reduction benefit of the fund’s long put during the unfolding downturn.
How is the fund expected to perform when a market rally occurs?
During a market rally, NUSI seeks to participate in the upside, but to a much lesser degree than a straight equity investment. Further, NUSI seeks to appreciate alongside an upward equity market and preserve capital during severe downturns over time, all while paying a consistent, monthly distribution.
If there is one thing you’d like our audience of advisors to take away when it comes to managing risk and producing income, what would that be?
Understand what you are investing in, the risk/reward tradeoff between yield and volatility, and the effects of leverage on an investment. We believe that NUSI is an investment solution that may help investors and advisors diversify their income portfolios by employing a distinct approach to creating a monthly income stream and lowering overall portfolio volatility.
Go to etf.nationwide.com for a prospectus and/or summary prospectus outlining the Fund’s investment objectives, risks, fees, charges and expenses, and other information that you should read and consider carefully before investing.
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. Nasdaq® and the Nasdaq-100® are registered trademarks of Nasdaq, Inc. (which with its affiliates is referred to as the “Corporations”) and are licensed for use by Nationwide Fund Advisors. The Product has not been passed on by the Corporations as to their legality or suitability. The Product is not issued, endorsed, sold, or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE PRODUCT. Nationwide Fund Advisors (NFA) is the registered investment advisor to Nationwide ETFs, which are distributed by Quasar Distributors, LLC. NFA is not affiliated with any distributor, subadviser, or index provider contracted by NFA for the Nationwide ETFs. Nationwide is not an affiliate of third-party sources such as Morningstar, Inc. or MSCI. Representatives of the Nationwide ETF Sales Desk are registered with Nationwide Investment Services Corporation (NISC), member FINRA, Columbus, Ohio.
Opinions expressed are subject to change at any time, are not guaranteed, and should not be considered investment advice. Any tax or legal information provided is merely a summary of our understanding and interpretation of some of the current income tax regulations and is not exhaustive. Investors must consult their tax advisor or legal counsel for advice and information concerning their particular situation.
DEFINITIONS: Covered Call: A financial transaction in which an investor selling call options owns the equivalent amount of an underlying security (i.e. holds a long position in the security). The investor’s long position in the underlying security serves as “cover” because it positions the investor to deliver the underlying security, should the buyer choose to exercise (or effect the right to buy the underlying security) the call option. Protective Put: A hedging strategy that uses options contracts and involves the purchase or ownership of a security and the purchase of put options to cover that position. On a standalone basis, puts may be classified as a bearish strategy, however a protective put is generally employed by investors who are still bullish, but who wish to hedge against potential losses and uncertainty.
KEY RISKS: The Fund is 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 Fund is 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 Fund may invest in more-aggressive investments such as derivatives (which create investment leverage and illiquidity and are highly volatile). The Fund employs 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 Fund’s investment strategy may depend on the effectiveness of the subadviser’s quantitative tools for screening securities and on data provided by third parties. The Fund expects to invest a portion of its assets to replicate the holdings of an index. Correlation between Fund performance and index performance may be affected by Fund expenses and because the Fund may not be invested fully in the securities of the index or may hold securities not included in the index. The Fund 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 Fund and greater tax liabilities for shareholders. The Fund may concentrate on specific sectors or industries, subjecting it to greater volatility than that of other ETFs. The Fund 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 Fund intends to invest in a variety of securities and instruments, the Fund will be considered nondiversified. Additional Fund risk includes: Collared options strategy risk, correlation risk, derivatives risk, foreign investment risk, and industry concentration risk.
MFM-3905AO (11/2020) Q-20201116-0007
By: Josh Silva
Partner, Portfolio Manager
Disclaimer and Other Important Information:
Not an offer and confidential: This site and the information in it is provided for your internal use only. The information contained herein is proprietary and confidential to Harvest Volatility Management LLC (the “Adviser”) and may not be disclosed to third parties or duplicated or used for any purpose other than the purpose for which it has been provided. The information presented herein may contain expressions of opinion, which are subjective, may be difficult to prove, and are subject to change without notice. Additionally, although the information provided herein has been obtained from sources which the Adviser believes to be reliable, we do not guarantee its accuracy, and such information may be incomplete or condensed. The information is subject to change without notice. This communication is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security or of any fund or account (a “Fund”) the Adviser manages or offers. Since we furnish all information as part of a general information service and without regard to your particular circumstances, the Adviser shall not be liable for any damages arising out of any inaccuracy in the information.
This site and the information contained in it should not be the basis of an investment decision. An Investment decision should be based on your customary and thorough due diligence procedures, which should include, but not be limited to, a thorough review of all relevant term sheets and other offering documents as well as consolation with legal, tax and regulatory experts. Any person subscribing for an investment must be able to bear the risks involved and must meet the particular Fund’s suitability requirements. Some or all alternative investment programs may not be suitable for certain investors. No assurance can be given that any Fund will meet its investment objectives or avoid losses. A discussion of some, but not all, of the risks associated with investing in the Fund can be found in the Fund’s investment advisory agreement, private placement memoranda, subscription agreement, limited partnership agreement, articles of association or other offering documents as applicable (collectively the “Offering Documents”), among those risks, which we wish to call to your attention, are the following:
Future looking statements, Performance Data and strategy level performance reporting: The information in this site is NOT intended to contain or express exposure recommendations, guidelines or limits applicable to a Fund. The information in this report does not disclose or contemplate the hedging or exit strategies of the Fund. While investors should understand and consider risks associated with position concentrations when making an investment decision, this report is not intended to aid an investor in evaluating such risk. The terms set forth in the Offering Documents are controlling in all respects should they conflict with any other term set forth in other marketing materials, and therefore, the Offering Documents must be reviewed carefully before making an investment and periodically while an investment is maintained. Statements made herein include forward-looking statements. These statements, including those relating to future financial expectations, involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Unless otherwise indicated, Performance Data is presented unaudited, “net” of management fees and other expenses, and net of performance allocations. Returns presented may reflect the reinvestment of dividends and other earnings. Due to the format of data available for the time periods indicated, both gross and net returns are difficult to calculate precisely. Accordingly, the calculations have been made based on in some cases limited available data and a number of assumptions. Because of these limitations, the performance information should not be relied upon as a precise reporting of gross or net performance, but rather merely a general indication of past performance.
The performance information presented herein may have been generated during a period of extraordinary market volatility or relative stability in a particular sector. Accordingly, the performance is not necessarily indicative of results that the Fund may achieve in the future. In addition, the foregoing results may be based or shown on an annual basis, but results for individual months or quarters within each year may have been more favorable or less favorable than the results for the entire period, as the case may be. If index information is included, it is merely to show the general trend in the markets in the periods indicated and is not intended to imply that the portfolio was similar to the indices in either composition or element of risk. This report may indicate that it contains hypothetical or actual performance of specific strategies employed by the Adviser, such strategies may comprise only a portion of any specific Fund’s portfolio, and, therefore, the reported strategy level performance may not correspond to the performance of any Fund for the reported time period. Please note that the Adviser calculates its assets under management with respect to its overlay strategies based on notional valuations and mandate sizes rather than market valuations.
Investment Risks: Investing in a Fund is speculative and involves varying degrees of risk, including substantial degrees of risk in some cases. A Fund may be leveraged and may engage in other speculative investment practices that may increase the risk of investment loss. Past results are not necessarily indicative of future performance, and a Fund’s performance may be volatile. The use of a single advisor could mean lack of diversification and, consequently, higher risk. A Fund may have varying liquidity provisions and limitations. There is no secondary market for investors’ interests in a Fund and none is expected to develop.
Not Legal, Accounting or Regulatory Advice: This material is not intended to represent the rendering of accounting, tax, legal or regulatory advice. A change in the facts or circumstances of any transaction could materially affect the accounting, tax, legal or regulatory treatment for that transaction. The ultimate responsibility for the decision on the appropriate application of accounting, tax, legal and regulatory treatment rests with the investor and his or her accountants, tax and regulatory counsel. Potential investors should consult, and must rely on their own professional tax, legal and investment advisors as to matters concerning a Fund and their investments in a Fund. Prospective investors should inform themselves as to: (1) the legal requirements within their own jurisdictions for the purchase, holding or disposal of investments; (2) and applicable foreign exchange restrictions; and (3) any income and other taxes which may apply to their purchase, holding and disposal of investments or payments in respect of the investments of the Fund.
This is not a solicitation to buy or an offer to sell interest in our funds, such offers will be made only by distribution of a private placement memorandum and only in compliance with applicable law.
1Please note that the Adviser calculates its assets under management with respect to its overlay strategies based on notional valuations and mandate sizes rather than market valuations. AUM is as of 7/31/2020.