Here's a situation that seems all too familiar. You've spent decades on the job and you're finally reaching retirement age. This should be one of the most satisfying moments of your life. You've finally reached the finish line and you'll now have the time to relax, to travel, to spend time with the grandkids or whatever else you choose to do.
There's one problem though and it's a big one. You haven't saved nearly enough over your working years to retire comfortably. Sure, you have Social Security to fall back on, but that was never meant to fund your entire retirement, only supplement your existing retirement savings.
Now, you're facing a fork in the road with two likely paths - cut back on your retirement plans to reflect the amount of savings you have to work with or (gasp!) keep working to build up your savings. Neither is necessarily the solution you're hoping for, but it's the situation you'll need to deal with.
If you stick with large-cap stocks, the maximum yield you can probably get without getting too risky is about 4%. The SPDR Portfolio S&P 500 High Dividend ETF (SPYD) and the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) are two options. You could dive into MLPs, BDCs or closed-end funds in order to get 8-10% yields, but you'd be putting your capital at high risk and exposing yourself to potentially significant drawdowns.
You need to find that balance between maximizing yield and minimizing risk.
Can You Get Higher Yield With Lower Risk?
The higher yield, lower risk options are rare, but they aren't non-existent. A straight stock investment probably isn't going to cut it, but the Nationwide Risk-Managed Income ETF (NUSI) uses an options-based strategy overlaying an equity index in order to, as the name suggests, manage risk while delivering a 7% yield in the process.
NUSI starts with a core investment in the Nasdaq 100 index. On top of that, the fund writes a covered option and sells a protective put option. The covered call increases portfolio income as the premiums received get distributed to shareholders, but they tend to limit upside since the options get called away in rising markets. The protective put essentially establishes a floor for how far the fund can fall in value during corrections or bear markets.
The overall result is that the option strategy significantly narrows the range of potential outcomes by limiting upside but protecting on the downside. That's how the fund's risk level is managed, while the net option income is what provides the 7% yield.
The fund is only one year old, so we don't have a lot of information to work with, but the early results suggest it's doing a pretty good job of achieving its objective.
The "category" in the above graphic is Morningstar's Option-Based U.S. Fund category.
Whether you're looking at beta or standard deviation as your risk measure, NUSI rates as considerably less volatile than its benchmark. The difference isn't quite as large when comparing it to its Morningstar peer group, but the story is still the same. NUSI does a really nice job of managing and limiting risk exposure, especially considering that the underlying index is the comparatively riskier Nasdaq 100.
NUSI's risk-adjusted returns, however, are what really set it apart. Both the Sharpe and Sortino ratios are double those of its benchmark and peer group.
If you measure NUSI against the Invesco QQQ ETF (QQQ), which tracks the Nasdaq 100 index, you'll obviously be disappointed. QQQ has returned about 60% over the past year versus a 15% return for NUSI. That's OK, because NUSI's objective isn't to keep up with the Nasdaq 100. It merely starts with that index as its basis before wrapping the risk management strategy around it. NUSI's objective is to try to eliminate extreme outcomes (a 60% return over a single year certainly qualifies), while delivering a high yield in the process. When measuring NUSI against comparable strategies, the superior performance becomes clear.
What About That 7% Yield?
Any high yield you see quoted by a fund should be taken with a grain of salt. Many high yields prove either unsustainable or too volatile to make them appropriate for retirement or near-retirement strategies.
NUSI, however, isn't one of those cases.
Its monthly distribution has come with only a modest degree of volatility. That should be expected because the options strategy will vary somewhat along with market conditions. But the first year of the fund's existence proves that NUSI can provide a reliable income stream.
The fund aims to keep its distribution level around a 7% annualized yield, which it has mostly been successful at. And did I mention that NUSI pays a MONTHLY distribution yield, not quarterly? That's particularly advantageous for those looking to live off of portfolio income, something that you don't often find among equity ETFs.
Any ETF providing a 7% yield is going to come with some degree of risk, but NUSI looks like one of the most conservative 7% yields you'll find in the ETF space. The fact that the underlying index is the Nasdaq 100 will always mean you're taking on an extra level of risk, but the options collar strategy helps to limit some of that risk by eliminating tail risk outcomes.
If you're a late starter saving for retirement (or are just looking for a high yield period) and have to make the best of the situation you're in, NUSI deserves some consideration.