To be clear though, NUSI is an income-first product, even though it may from time to time be able to capture a portion of NDX® appreciation or offer a measure of downside protection. For example, if most of the option premium has been captured or if the market moves higher, the model may indicate that it’s time to close the call, potentially “uncapping” the portfolio and allowing the underlying portfolio securities to appreciate alongside the NDX®. The rules-based option strategy is unique in that there are built-in triggers that indicate – based on years of data and research – opportune times to close the short call. A portion of that premium is then used to buy an out-of-the-money NDX® put option, which seeks to provide a measure of downside protection. NUSI’s rules-based options strategy starts by selling an out-of-the-money Nasdaq-100 Index call option, which generates option premium. Each month, it deploys an options overlay strategy, called a net credit collar, that seeks to generate tax-efficient income, lower portfolio volatility, and provide a measure of downside protection. Garrett: As its core underlying investment, NUSI buys all of the stocks in the Nasdaq-100 Index® ( NDX®). Q: How does NUSI generate income while managing risk? Investors need to figure out how much more income they need now compared to 12-18 months ago, and how they can leverage yield-oriented products to generate that income without taking on more risk. It’s harder to get back to even much less back to making a return, and many people have less money to invest in income-oriented products. But with rates coming off historic lows and inflation at 40-year highs, real rates of return are negative and purchasing power is weakened. Intuitively, rising interest rates should be welcomed by yield-seeking investors. However, generating income is more difficult nowadays. In addition to receiving dividends and interest on equities and fixed income securities, they’re looking for alternative products that generate tax-efficient income – ideally ones that aren’t highly correlated with other income buckets. Garrett: Investors want to protect their money, reduce volatility, and generate more net after-tax income. Q: What are income investors looking for in the current environment, and what challenges are they facing in achieving their objectives and goals? Given the macro environment, we believe it’s critical to build a robust asset allocation for the long term driven by each individual’s investment objectives and goals. Not surprisingly, investors remain cautious. That said, core bond portfolios were down nearly 13% in 2022. Rates and yields are slightly higher now, so fixed income looks more attractive. All this uncertainty is contributing to volatility – some of which is priced in, and some is not. Moreover, there are geopolitical headwinds from Russia’s invasion of Ukraine. The Federal Reserve has raised interest rates nine times, but inflation remains stubbornly high, so it’s unclear how many more increases are to come. All asset classes – unless they were inflation hedged and/or interest protected – produced a negative return. 2022 was one of the worst years on record for a 60/40 overall allocation. Garrett: The Federal Reserve’s shift from quantitative easing to quantitative tightening has had a tremendous impact on the financial markets. Q: For background, what is your outlook on the macroeconomy and the market? We talked to Garrett Paolella, Portfolio Manager of the Nationwide Risk-Managed Income ETFs, about why this strategy could be effective in the current macroeconomic environment: NUSI is unique because it sources income by leveraging the volatility of the Nasdaq-100 Index® while also seeking tax-efficient monthly income structured as a return of capital (a type of income distribution not taxable in the year it is received). The Nationwide Nasdaq-100® Risk-Managed Income ETF ( NUSI) uses a rules-based option strategy that seeks to offer high monthly income with a measure of downside protection in falling markets. The challenge lies in constructing a portfolio that maximizes income and minimizes downside risk. Dividends and interest from equities and fixed income securities are important sources of income, but many investors today are looking for alternative yield-oriented strategies to improve their returns. Most investors are concerned with having enough income to maintain or improve their lifestyles - especially once they reach retirement.
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