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?