Traditional money managers see an opportunity to bring specialized investment strategies into the exchange traded fund space, catering toward ETF-centric investors that seek income and better risk management.
For example, Nationwide recently launched the Nationwide Risk-Managed Income ETF (NUSI) to help investors target high current income with less risk relative to traditional income-focused investments. The fund strategy seeks to provide some downside protection while maintaining upside potential. Harvest Volatility Management sub-advises the fund.
“It really reaffirms Nationwide’s commitment to bring institutional quality solutions to a broader retail audience, and Harvest has, I think, differentiate in themselves since being launched in 2008 as a leader in derivative asset management,” Marge Farquharson, Head of Exchange-Traded Funds, Nationwide, said at the Inside ETFs conference.
The Nationwide Risk-Managed Income ETF uses 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.
A covered call refers to an options strategy where an investor writes or sells a call option on an asset which they already own or bought on a share-for-share basis to generate income via premiums derived from the sale of the call options.
A protective put is an options strategy where an investor purchases a put option on an asset which they already own or bought on a share-for-share basis to limit potential losses. The protective put will cause profits derived from the strategy to be reduced by the premium paid for the put, but it limits the maximum potential losses.
The ETF will try to achieve 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.
“In a low-yield environment, this is a really innovative solution. So, it gives you the opportunity o generate additional income for any investment portfolio while dampening volatility along the way without adding to the associated risks of traditional alternative income or bond investments,” Jonathan Molchan, Executive Director and Lead Portfolio Manager of NUSI, Harvest Volatility Management, said.