NUSI: an ETF with high yields and crash protection?

How NUSI works

NUSI starts off pretty simply by tracking the NASDAQ 100 index via a full replication approach (buying and holding all of its underlying stocks). Then, the fund implements a rules-based protective net-credit collar strategy by:

1. First selling an at-the-money (ATM) or out-of-the-money (OTM) call NASDAQ 100 index option, which nets NUSI a cash premium.
2. Using a portion of that premium, NUSI purchases an out-of-the-money put option, which caps its downside risk.

By doing so, the ETF's upside and downside risks are capped. NUSI might underperform during bull markets as its upside is capped at the strike price of the call option sold. 

However, it can outperform during sideways markets if the calls keep expiring out of the money. During a sharp crash, its downside risk is capped at the strike price of the put option purchased. 

Below is a diagram from NUSI's whitepaper, which illustrates the payoff of an options collar strategy:

Because the cash premium from selling the call is more than the cost of buying the put, NUSI has a net cash credit leftover, which is paid out to investors as a monthly distribution. Currently, the ETF has a 12-month trailing yield of 9.39%, which is very high. 

Advantages/disadvantages of NUSI

I think NUSI is best suited for investors with a low risk tolerance and defined income needs. For instance, the retiree who needs a steady 4% withdrawal rate and low portfolio volatility. With bonds suffering during rising-rate environments, an options collar strategy might be a decent alternative. 

Younger investors with a high-risk tolerance and long-time horizon might not like NUSI given its lower total returns, especially during bull markets which are far more common than the conditions we're seeing in 2022. Since its inception, NUSI has underperformed the NASDAQ 100:

This isn't a completely fair comparison though, as NUSI's strategy isn't achieving the highest total returns. If we look at it from a volatility-reduction standpoint, NUSI posted a lower standard deviation and max drawdown.

NUSI shines most during prolonged sideways trading markets and sharp crashes. The former helps covered calls expire out of the money, thus not capping its gains, whereas the latter gives the greatest payoff for put options. 

We can see the former in action during 2022, where NUSI outperformed NASDAQ 100 due to the cushion provided by its call option premiums. 

We can see the latter in action during the March 2020 crash, where NUSI fell far less due to its put options gaining in value. 

As with most actively managed funds, finding success with NUSI means understanding your own risk tolerance and investment objectives. If your goal is maximizing long-term returns, a vanilla stock and bond index ETF might be more suitable. If your goal is a defined, consistent source of income with predictable volatility, you could do worse than NUSI. 

Please note this article is for information purposes only and does not constitute investment advice.