NUSI Vs. JEPI: Don’t Put Collars On A Bubble (NYSEARCA:JEPI)

Note: This was written pre-market on February 18, 2022. All values are as of February 17, 2022 close.

JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) and Nationwide Risk-Managed Income ETF (NYSEARCA:NUSI) are two funds well known amongst income investors. We have covered these a few times before. While we had both at a neutral rating initially, we shifted our stance in December.

We are putting a neutral rating on JEPI as it does at least work hard with active management to avoid the worst of the bubble (and future rubble). We are putting a sell on NUSI as we think the bubble unravels over the next 12 months and NUSI should take a decent sized hit.

Source: Just One Clear Winner

About a month later, we raised the stakes.

We are doubling down on our stance and telling you that JEPI will wipe the floor with NUSI.

Source: Did The Huge Underperformance Surprise You?

We examine the performance since the sell rating on NUSI and show you some more data on the reason for NUSI’s poor performance.

Performance

Since December 7, 2021, NUSI has lagged appreciably vs JEPI. More importantly, it has almost kept pace with the Invesco QQQ Trust (QQQ).

This is the problem with the collar strategy. We tried very hard to get this point across before it happened, but the crowd appeared to be fixated on the performance during COVID-19. To show you what happened here let us look at the NASDAQ futures. Around the time the January options were rolled, the NASDAQ Futures were at the point shown (15,167.25).

The put options purchased by NUSI were at 14,275. So ignoring the cost of those options (since they were financed by selling calls), the NASDAQ could decline by about 5.9% before the protection kicked in. Now while the NASDAQ did breach significantly below that and that was what led to some cheerleading that the strategy was working, it ended yesterday at 14,164.00. So the puts were able to mitigate a decline of 0.7% out of a total drop of 6.6%. As of the latest holdings, NUSI has shifted the options to March.

Notice that the put is now at 13,500, so another 664 NASDAQ points will be unbuffered. More importantly, the call is now at 14,350. So any rebound whatsoever, will be given up above that level. This is a difficult choice that managers have to make every single month and we don’t envy their position.

JEPI Is Doing As Expected

With a strong value bent and focus on selling options on the index itself, JEPI has got the best of both worlds. It is effectively creating a slight short position on growth versus value and it is paying off handsomely. This is similar, although a less extreme version of the strategy we employ in our Market Place Service. Between December 3, 2021 and February 11, 2022, our Covered Call portfolio was up about 5.1%. We used slightly different dates as we update option quotes at the end of the week only. During this time frame, JEPI was almost exactly flat.

Collars During Last Bubble

We also want to show you a little simulation we ran on how collars would have fared during the NASDAQ bubble in 2000. Note a few things here before you rush to any conclusion.

1) We chose the collars with put protection at 6% and calls sold at 3%. Both were only closed at expiration.

2) There was no slippage and management fees were not applied.

3) This is a robotic strategy and likely a human would outperform.

4) We are only showing how this strategy did. Extrapolating that to NUSI may not be warranted.

5) Every bubble and cycle is unique. A sample size of just one, as shown here, should be used with extreme caution.

6) This is data applied on QQQ as we already have similar data for S&P 500 collars.

7) The gains and losses from the strategy are kept separate (not added back into the pool) and this likely understates the return. Since we are not applying any management fee or slippage, we think the two counteract each other to some extent.

With that said, let us look at the results. The collars were effective during some months and you can see some huge gains where the collars offset declines. There were also some big losses. On the whole, applying a collar strategy resulted in a total return of negative 33.33% over the time frame tested.

This is very similar to the S&P 500 (SPY) return over that time frame and a bit worse than a buy and hold on S&P Value ETF (IVE)

Verdict

NUSI remains a sell for us and the reasons have not changed. Collars are an inferior strategy to protect against downturns, especially when applied on a bubble. They would fail just as badly if you applied them to the Nikkei Index in 1990 or to Gold stocks in 1980. Sure the chances are high you will outperform the NASDAQ from here on. But if you are looking to actually have a positive return then NUSI might not be your best bet. JEPI continues to show why we like it and remains preferable to NUSI. We will note that JEPI’s mutual fund equivalent, which existed before JEPI, has now outperformed NUSI as well. This is despite the big advantage that NUSI had during the COVID-19 crash.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.