NUSI: ETF that uses a collar option strategy to protect against downside

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
thebeerfund
Posts: 5
Joined: Tue May 05, 2020 5:13 pm

NUSI: ETF that uses a collar option strategy to protect against downside

Post by thebeerfund »

I'm currently planning to enter the market and I'm concerned about volatility, since I would like access to the funds on a 7-10 year horizon.
I came across an interesting ETF that uses an option collar strategy to protect against downside risk. That is, it sells call options against the underlying securities and then uses the proceeds to buy protective puts.

It's called NUSI, or Nationwide Risk-Managed Income ETF.

It's appealing to me for a few reasons:
  • I looked at its performance during the recent crash and it outperformed everything else.
  • It pays out a generous dividend (from the sale of call options) that is competitive with bond funds: 7.71% (which will certainly fluctuate if the market rebounds aggressively)
  • Although it has a higher expense ratio, it would be easier to buy this than try to build my own downside protection (e.g., buying protective puts), which can be a full time job.

My goals would be to avoid inflation risk and have reasonable returns without a large drawdown.

I had two questions:
  • What might be the risks with buying this ETF?
  • What would the tax treatment be when the stocks they trade have protective puts on them? I believe it resets the clock on capital gains. Are those taxes deducted by the fund manager from the returns or does it get paid by the holder when the 1099 is distributed?
For reference: NUSI Fact Sheet

Image
DesertMan
Posts: 319
Joined: Tue Dec 07, 2010 12:54 pm

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by DesertMan »

Also interested. Here is the ETF.com profile. It says no K1 tax forms.
jjj_22
Posts: 23
Joined: Sun Dec 08, 2019 3:07 pm

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by jjj_22 »

thebeerfund wrote: Tue May 05, 2020 5:39 pm
  • What might be the risks with buying this ETF?
I think the main and fundamental risk is of underperforming during good times: selling calls means the upside is capped, and puts may expire worthless.

Also, most of the times are good times.

The expense ratio means you're paying for the privilege of underperforming most of the time.

But if you're willing to pay that cost for decreased drawdowns, maybe that's a legit tradeoff. I don't understand options well enough to have a sense for how this would behave under all kinds of different possible scenarios for the next 7-10 years though.

I admit, also, that I am inherently skeptical of strategies like this, so I am approaching it with a negative rather than neutral outlook.
annu
Posts: 1039
Joined: Mon Nov 04, 2019 7:55 pm

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by annu »

Ok, I had some times so compares this with BND, total bond market. See below. Why would I not just increase bnd allocation, with lower expenses and also simpler invesment, get same or better results? Bonds are there to minimize drawdowns, something that this etf will do, with all kind of maneuvers.



https://www.portfoliovisualizer.com/bac ... ion2_2=100
Topic Author
thebeerfund
Posts: 5
Joined: Tue May 05, 2020 5:13 pm

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by thebeerfund »

annu wrote: Wed May 06, 2020 12:47 am Ok, I had some times so compares this with BND, total bond market. See below. Why would I not just increase bnd allocation, with lower expenses and also simpler invesment, get same or better results? Bonds are there to minimize drawdowns, something that this etf will do, with all kind of maneuvers.



https://www.portfoliovisualizer.com/bac ... ion2_2=100
Thanks for pulling this together. However. I still can't get it to return more + have lower drawdowns. I tried adding QQQ as 50% of the portfolio (to reflect the exposure in NUSI) but that doesn't seem to make it work either. See here.

Also, the dividend yield is much larger from selling calls on NUSI's underlying positions vs. the coupon payments from bonds, since interest rates are effectively zero right now.
annu
Posts: 1039
Joined: Mon Nov 04, 2019 7:55 pm

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by annu »

thebeerfund wrote: Wed May 06, 2020 1:08 am
annu wrote: Wed May 06, 2020 12:47 am Ok, I had some times so compares this with BND, total bond market. See below. Why would I not just increase bnd allocation, with lower expenses and also simpler invesment, get same or better results? Bonds are there to minimize drawdowns, something that this etf will do, with all kind of maneuvers.



https://www.portfoliovisualizer.com/bac ... ion2_2=100
Thanks for pulling this together. However. I still can't get it to return more + have lower drawdowns. I tried adding QQQ as 50% of the portfolio (to reflect the exposure in NUSI) but that doesn't seem to make it work either. See here.

Also, the dividend yield is much larger from selling calls on NUSI's underlying positions vs. the coupon payments from bonds, since interest rates are effectively zero right now.
Well, if you are focusing on least drawdown, I will not pair with qqq, buy maybe long term treasury. See below, it beats it in both returns and lower drawdown.

https://www.portfoliovisualizer.com/bac ... tion3_2=40
RomeoMustDie
Posts: 280
Joined: Sat Mar 14, 2020 6:07 pm

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by RomeoMustDie »

thebeerfund wrote: Tue May 05, 2020 5:39 pm I'm currently planning to enter the market and I'm concerned about volatility, since I would like access to the funds on a 7-10 year horizon.
I came across an interesting ETF that uses an option collar strategy to protect against downside risk. That is, it sells call options against the underlying securities and then uses the proceeds to buy protective puts.

It's called NUSI, or Nationwide Risk-Managed Income ETF.

It's appealing to me for a few reasons:
  • I looked at its performance during the recent crash and it outperformed everything else.
  • It pays out a generous dividend (from the sale of call options) that is competitive with bond funds: 7.71% (which will certainly fluctuate if the market rebounds aggressively)
  • Although it has a higher expense ratio, it would be easier to buy this than try to build my own downside protection (e.g., buying protective puts), which can be a full time job.

My goals would be to avoid inflation risk and have reasonable returns without a large drawdown.

I had two questions:
  • What might be the risks with buying this ETF?
  • What would the tax treatment be when the stocks they trade have protective puts on them? I believe it resets the clock on capital gains. Are those taxes deducted by the fund manager from the returns or does it get paid by the holder when the 1099 is distributed?
For reference: NUSI Fact Sheet

Image
Seems like you can get this same effect by shifting more AA to BND.
User avatar
Nate79
Posts: 7168
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by Nate79 »

Interesting how it looks like they have taken their methodology of something like the fixed indexed annuities and turned it into an ETF, probably for a lower cost. I wonder if their insurance sales team will be pushing this or not?
David Althaus
Posts: 321
Joined: Wed Feb 14, 2018 8:05 pm

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by David Althaus »

I certainly admit to negative bias against these things as they tend to blow up at the worst possible time. Maybe what you're actually saying "My risk level is too high because I seek a hedge." Consider lowering your overall risk level to a place where you no longer need such a hedge strategy. Lowering risk in this manner is more predictable and certainly a lot less expensive.

All the best
DesertMan
Posts: 319
Joined: Tue Dec 07, 2010 12:54 pm

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by DesertMan »

The arguments for using something like this over just adding bonds to your portfolio are...
1. Interest rates are extremely low so bonds don't give you much return.
2. For the same reason, you will lose principal on your bonds if rates rise and they almost certainly will
3. You have simplicity here in onw ETF vs having to buy a target fund that suits you (but see the ishares allocations ETFs)
User avatar
grabiner
Advisory Board
Posts: 29905
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by grabiner »

There is no free lunch in the market. Before expenses, any risk reduction should come with a commensurate reduction in expected returns. After expenses, it may be worse; you could get risk reduction for the same price by holding less stock and buying a bond fund. In a taxable account, it may also be less tax-efficient, as there will be capital gains on the options, or on stocks if the options are exercised.
Wiki David Grabiner
mojorisin
Posts: 176
Joined: Sun Nov 27, 2011 9:19 pm

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by mojorisin »

OP: what did you end up doing here? I have been investigating NUSI vs. BND as well. Or I'm considering shifting to 50% BND 50% NUSI in my IRA's (where I hold my bonds).
effigy98
Posts: 76
Joined: Wed Sep 25, 2019 8:57 pm

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by effigy98 »

I replaced bonds with NUSI. The monthly dividend is uplifting to see them streaming in (at 8%) and the downside protection is nearly as good as short term treasuries. This is my favorite etf now. I may get a 2.5% M1 finance loan and put it all in NUSI.
mojorisin
Posts: 176
Joined: Sun Nov 27, 2011 9:19 pm

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by mojorisin »

effigy98 wrote: Tue Mar 16, 2021 12:45 am I replaced bonds with NUSI. The monthly dividend is uplifting to see them streaming in (at 8%) and the downside protection is nearly as good as short term treasuries. This is my favorite etf now. I may get a 2.5% M1 finance loan and put it all in NUSI.
You timed it good. Bond funds are now down ~8% off their highs with increased rates.

I'll be moving some of my bond funds to NUSI. Keep us posted if your view changes.
bberris
Posts: 1707
Joined: Sun Feb 20, 2011 9:44 am

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by bberris »

Alternative: save the 0.7 % expense and buy the corresponding ETF for the NASDAQ 100 and index options (buy a put, sell a call)
bberris
Posts: 1707
Joined: Sun Feb 20, 2011 9:44 am

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by bberris »

annu wrote: Wed May 06, 2020 2:37 am
thebeerfund wrote: Wed May 06, 2020 1:08 am
annu wrote: Wed May 06, 2020 12:47 am Ok, I had some times so compares this with BND, total bond market. See below. Why would I not just increase bnd allocation, with lower expenses and also simpler invesment, get same or better results? Bonds are there to minimize drawdowns, something that this etf will do, with all kind of maneuvers.



https://www.portfoliovisualizer.com/bac ... ion2_2=100
Thanks for pulling this together. However. I still can't get it to return more + have lower drawdowns. I tried adding QQQ as 50% of the portfolio (to reflect the exposure in NUSI) but that doesn't seem to make it work either. See here.

Also, the dividend yield is much larger from selling calls on NUSI's underlying positions vs. the coupon payments from bonds, since interest rates are effectively zero right now.
Well, if you are focusing on least drawdown, I will not pair with qqq, buy maybe long term treasury. See below, it beats it in both returns and lower drawdown.

https://www.portfoliovisualizer.com/bac ... tion3_2=40
You are getting high returns because the risk is higher than bonds. If you bought a stock, and its put, and wrote its call both at the strike price of the current stock price you would have completely hedged the stock position; the put protecting the downside and the call obligating you for the upside. In an efficient market, you would have slightly higher return than the risk free rate (because of the counterparty risk). If you want higher returns, increase your risk; buy a slightly out-of-the-money put, sell a OOM call.
mojorisin
Posts: 176
Joined: Sun Nov 27, 2011 9:19 pm

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by mojorisin »

Can somebody explain how the risk in NUSI is higher than bonds?
I understand how bonds and bond funds work.
I understand what NUSI is doing to provide a return.

However I have not connected the dots of why NUSI is higher risk than Bonds.

In addition, what is the downside risk of NUSI? It held well during the Covid crash. So what are the mechanics of it's downside? What would drop the price or cause a loss of investment?
User avatar
Scott S
Posts: 1840
Joined: Mon Nov 24, 2008 3:28 am
Location: building my position

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by Scott S »

So, instead of moving our bond money into boring dividend stocks, we're moving it into funds employing derivatives on large-cap tech companies?

This should end well. :D
"Worry is interest paid on trouble before it becomes due." -- William R. Inge
effigy98
Posts: 76
Joined: Wed Sep 25, 2019 8:57 pm

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by effigy98 »

Still very happy with NUSI. It is doing exactly what I needed it to do for my asset allocation and risk tolerance. In a world of negative real rates, we are being forced to be creative. The monthly dividend is psychologically helpful for me as well. I tried doing my own NUSI and I just don't have the discipline to do it right consistently. I will gladly pay a reasonable fee for that service. I miss my long bonds, but wouldn't have missed the crazy drawdowns. The only bonds I still have indirectly with NTSX. NTSX I still like the best as my core holding and NUSI just plays another part of my asset allocation. I have backtested max drawdowns down to under 5% while easily maintaining the 4% inflation adjusted SWR which is my goal.
mojorisin
Posts: 176
Joined: Sun Nov 27, 2011 9:19 pm

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by mojorisin »

I moved 3% of my allocation to a mix of NUSI and QYLD. Lowered bond allocation from 15% to 12%. Its increased compounding interest rate. $200k of NUSI is generating more than $600k of my bond allocation in compounding dividends.
Escapevelocity
Posts: 597
Joined: Mon Feb 18, 2019 8:32 am

Re: NUSI: ETF that uses a collar option strategy to protect against downside

Post by Escapevelocity »

I need to see how this performs in an extended bear market for tech before I’m willing to invest.
Post Reply