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NUSI: Know What You're Buying When Buying Derivatives

Harrison Schwartz profile picture
Harrison Schwartz


  • The stock market appears to be in a precarious position with rising volatility and growing drawdowns.
  • Extreme margin debt, low liquidity, overextended speculation, rising interest rates, taxes, and a weak economy may cause a large bear market soon.
  • Investors can reduce downside risk through derivative-based ETFs like Nationwide's Risk-Managed Income ETF NUSI.
  • NUSI offers downside protection while capping upside potential at around 10-15% in either direction on a monthly basis.
  • Income-oriented investors should not rely on NUSI's high dividend yield last year since such a yield would normally cause the fund's price to decline in a flat market.

Markets have seen a spike in volatility over the past few weeks. The Nasdaq 100 ETF (QQQ) is about 7-9% below its peak. Last year's top performers such as Tesla (TSLA) have lost around a third of their value and some small technology firms are seeing even greater drawdowns. As detailed in-depth in "VGT: There Have Never Been These Many Bearish Catalysts" and "DRIV: The Electric Vehicle Bubble Is Bursting," there is a significant possibility that this drawdown will compound.

Individual investor cash levels are at historical minimums while margin debt is nearing $1T USD (nearly twice 2007 and 1999 peak levels). Many of the new investors from last year will soon have held for over twelve months, which means they'll be able to take profits with a lower tax burden. Interest rates are rising due to inflationary forces which cannot be stopped by additional quantitative easing. The economy, though stronger, remains in a precarious position.

Even if the market has another leg higher, I believe the possibility of a 40%+ sell-off has never been as high as it is today. I say this not to incite fear, but to encourage action; reasonable and rational actions that reduce portfolio risk. Indeed, there are very few "safe" assets today and cash is not desirable considering low savings rates and rising inflation.

Investors may look toward derivative-based "protected" equity funds such as Nationwide's Risk-Managed Income ETF (NYSEARCA:NUSI). NUSI is targeted toward retired investors who seek a high-income yield with less risk. Its webpage showcases its "income risk + downside protection" opportunity. On the surface, this pitch may seem to be a "no risk high reward" investment. Particularly considering its strong performance and 7.5% TTM yield shown below:

ChartData by YCharts

NUSI has generated both a strong dividend, decent appreciation, and hardly experienced the sharp

This article was written by

Harrison Schwartz profile picture
Harrison is a financial analyst who has been writing on Seeking Alpha since 2018 and has closely followed the market for over a decade. He has professional experience in the private equity, real estate, and economic research industry. Harrison also has an academic background in financial econometrics, economic forecasting, and global monetary economics.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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