NUSI - NUSI: No Added Value

2023-04-23 06:29:59 ET

Summary

• NUSI uses a collar strategy on the Nasdaq 100 index.
• Collars are often used to protect against potential downside risk, while still generating income from selling covered calls.
• Unfortunately NUSI didn’t offer downside protection last year.
• Buying put options is expensive and this hampers NUSI’s performance.

Covered call ETFs are popular among income oriented investors. Today we discuss an ETF that also targets income oriented investors: the Nationwide Nasdaq-100 Risk-Managed Income ETF ( NUSI ).

NUSI use also a covered call strategy but it additionally buys put options. So while the upside potential is capped the same way as it is the case with DIVO and JEPI, NUSI has better drawdown protection due to the put options it buys. It has to pay for those put options of course and hence the income potential is a bit lower.

The combination of establishing a long position (in the case of NUSI in the Nasdaq-100 index), selling a covered call and buying a put is also known as a collar. The goal of a collar is to generate income and at the same time limit the potential downside risk while still allowing for limited upside potential. A collar strategy is even less volatile than a covered call strategy.

NUSI

The Nationwide Nasdaq-100 Risk-Managed Income ETF invests in the Nasdaq-100 Index and sells near at-the-money (ATM) to out-of-the-money (OTM) Nasdaq-100 Index call option, with the intent of generating income. Using a portion of the premium received, Nasdaq-100 Index put options are purchased to fully hedge the portfolio in order to protect against potential losses in the underlying equity portfolio.

A managed distribution is paid to investors each month using the income generated by the collar. NUSI managed to pay out 0.65% each month (or 7.8% annualized) so far.

The expense ratio is 0.68%.

Protective puts

A collar strategy is a combination of a covered call and a protective put. In previous articles about the Amplify CWP Enhanced Dividend Income ETF ( DIVO ), the JPMorgan Equity Premium Income ETF ( JEPI ) and the InfraCap Equity Income Fund ETF ( ICAP ) we already discussed the ins and outs of covered call strategies. Let’s focus on the protective puts now. Buying puts is a so-called tail risk hedging strategy. There are two kinds of tail hedging strategies: direct and indirect. Direct tail hedging is done by buying put options, while indirect hedging is trend following (or managed futures). We’ve written before about trend following in general and the KFA Mount Lucas Index Strategy ETF ( KMLM ) and the iMGP DBi Managed Futures Strategy ETF ( DBMF ) in particular.

The common view that buying put options is a more effective hedge against sharp drawdowns but costs more than trend following. Many investors fear sharp market declines, so it is not surprising that option-based protection against such events has a high cost.

During the Covid sell-off NUSI did indeed offer downside protection, compared to the Invesco QQQ ETF ( QQQ ) and the Global X NASDAQ 100 Covered Call ETF ( QYLD ).

Trend following on the other hand is better suited to slower, protracted bear markets.

After a sharp market decline, volatility rises of course sharply and this makes buying new puts more expensive. Research by AQR shows that as a result trend following is in the long run outperforming. AQR compared the long term performance of both strategies between January 1985 and March 2020.

The two series in Figure 3 are scaled to have a comparable volatility.

In slower, protracted bear markets, like in 2022, NUSI’s performance was indeed less stellar. You could even say that there was no downside protection.

Even QYLD, who is supposed to have less downside protection than NUSI, was performing better than NUSI!

When we compare the drawdowns we get the same picture.

And in a bull market one can see both the impact of the capped upside potential and the cost of buying protective puts (by comparing with QYLD).

It seems NUSI only offers lower volatility when the market is performing well.

All-in-all, NUSI offers a disappointing (total return) performance since inception.

Also compared to a collar strategy on the S&P 500 the performance is disappointing.

What about risk-adjusted returns? A covered call strategy is low beta; QYLD has a beta of 0.68. A collar strategy is even lower beta (with a beta for NUSI of 0.50). The volatility of NUSI is indeed lower and this should have a positive impact on risk adjusted return measures like e.g. Sharpe-ratio or Sortino-ratio. But the performance is so bad that it doesn’t help.

Conclusion

Based on our long term trend indicator DIVO remains our favoured covered call ETF, with JEPI as a good runner-up. We keep avoiding ICAP.

DIVO is the only one with a positive total return over the past twelve months, while ICAP remains the laggard.

What about NUSI? We see no real added benefit for adding NUSI to a portfolio. The performance during the weak stock market in 2022 was simply too bad for an ETF that is supposed to offer low volatility and downside protection.

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