Home etftrends.com Covered Calls Still Matter as Treasury Yields Rise

Covered Calls Still Matter as Treasury Yields Rise

As of March 5, 10-year Treasury yields more than doubled over the past six months. Higher yields may sound enticing, but that scenario also means bond prices are declining, indicating investors are taking on risk with supposedly safe domestic government debt.

That doesn’t mean generating income has to be risky. Consider the Nationwide Risk-Managed Income ETF (NYSEArca: NUSI).

Rather than relying on dividend stocks or interest from bonds, NUSI generates income from covered calls. Covered call strategies such as NUSI can augment a portfolio during periods of heightened volatility. The options allow an investor to hold a long position in an asset while simultaneously writing or selling call options on the same asset.

“Investors looking for other alternatives might take a look at covered-call funds, which generate income by purchasing shares and selling call options against them. Historically they have produced solid income and steadier returns than the stock market has. And right now, they’re looking like a better deal than most bonds,” reports The Wall Street Journal.

NUSI Basics

NUSI can act as a complement to traditional equity and fixed income allocations or as a potential 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.

Adding to the allure of NUSI is that its strategy is free of interference, allowing for pure income. Said another way, it’s not reliant on assistance from the Federal Reserve.

“And then there are the contributing factors. The government is keeping short-term interest rates low, which is good for bonds, as they produce fixed income. The Federal Reserve and foreign central banks have also been keeping long-term rates low with massive purchases of Treasury bonds,” according to the Journal.

NUSI is an actively managed portfolio of stocks included in the Nasdaq-100 Index. 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[1] and buying put options[2], 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 retained option premiums.

Additionally, covered calls may be an idea worth considering for income-seeking investors.

Covered calls are also a worthy alternative to bonds, with volatility somewhere between that of shares and bonds, reports the journal.

1. Call options are financial contracts that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity or other asset or instrument at a specified price within a specific time period.

2. A put is an options contract that gives the owner the right, but not the obligation, to sell a certain amount of the underlying asset, at a set price within a specific time. 

A covered call refers to a financial transaction in which the investor selling call options owns an equivalent amount of the underlying security.

An options contract is an agreement between two parties to facilitate a potential transaction on the underlying security at a preset price, referred to as the strike price, prior to the expiration date.

This article was prepared as a part of Nationwide’s paid sponsorship of ETF Trends.

Performance data quoted represents past performance; past performance does not guarantee future results. Index performance is not illustrative of fund performance. One cannot directly invest in an index. Please call 1-877-893-1830 for fund performance.

ETFs, hedge funds, equities, bonds, and other asset classes have different risk profiles, which should be considered when investing. All investments contain risk and may lose value. 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.

NUSI Prospectus

Call 1-800-617-0004 to request a summary prospectus and/or a prospectus. You may also download the prospectus at the link above or by visiting etf.nationwide.com. These prospectuses outline investment objectives, risks, fees, charges and expenses, and other information that you should read and consider carefully before investing.

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.

Nasdaq-100 Index: An unmanaged, market capitalization-weighted index of equity securities issued by 100 of the largest non-financial companies, with certain rules capping the influence of the largest components. It is based on exchange, and it is not an index of U.S.-based companies. Market index performance is provided by a third-party source Nationwide Funds Group deems to be reliable (Morningstar). Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses have been reflected. Individuals cannot invest directly in an index.

Nationwide Fund Advisors (NFA) is the registered investment advisor to Nationwide ETFs, which are distributed by Quasar Distributors LLC. NFA is not affiliate with any distributor, subadviser, or index provider contracted by NFA for the Nationwide ETFs.

Nationwide, the Nationwide N and Eagle and Nationwide is on your side are service marks of Nationwide Mutual Insurance Company. © 2021 Nationwide

MFM-4056AO (03/21) Q-20210310-0043

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