MFOHome About Commentary Discussions Funds The Best Resources Support Us!

Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

Sign In Register

Categories

In this Discussion

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

Question re: ETF NUSI from Nationwide - Tax treatment of distributions, "return of capital"

VegomaticVegomatic
edited August 2020 in Fund Discussions
[1] ETF.com PROFILE: https://www.etf.com/NUSI
[2] NUSI PAGE AT NATIONWIDE: https://nationwidefinancial.com/products/investments/etfs/fund-details/NUSI
[3] NUSI FACTSHEET: https://nationwidefinancial.com/media/pdf/MFM-3425AO.pdf
[4] RULE 19a-1 DISCLOSURE, JUL 2020: https://nationwidefinancial.com/media/pdf/MFN-0324M7.pdf [a]

NUSI is an ETF from Nationwide that uses an options strategy to generate income from its holdings in the Nasdaq 100.

According to the "Supplemental Tax Information" appearing near the bottom of the fund page (#2), the fund seems to be distributing a "return of capital", although precise categorization won't be known until after year-end.

QUESTION: Can someone explain (or provide a reference to) what it is about options trading that produces this "return of capital"?

[a] For example, the 19a-1 disclosure linked above includes the following:

In connection with the monthly dividend payment of $0.1793 per share payable on July 24, 2020 to shareholders of record on July 23, 2020, it is anticipated that 100% of such dividend will be a return of capital.

Comments

  • MarkMark
    This might help.

    ROC: The Great Decider

    It also helps to think that when you buy an option, either a put or a call, you can earn a profit just by holding the option even if the option is not executed.
  • VegomaticVegomatic
    edited August 2020
    Mark: Thanks for reply/comments. Thanks for link to ROC post, but it is an explanation of Return ON Capital. I was asking for clarification/explanation of Return OF Capital.

    Since posting my question, I came across helpful post from 'Greg Group' which says (in part):
    The premiums received for the call writes is not considered income until the position has been completed or ended. Therefore, the CEF has the cash premiums but it can’t be considered income because the option trade has not ended. When this cash is used for distributions, it will be classified as return of capital instead of income. In reality, this distribution was not a result of returning cash from exceeding the growth of income and it is not a transfer of equity value from the company to shareholders. The distribution is merely classified as return of capital because it does not meet the terms of recognized income yet.
    Full link (at SeekingAlpha) is here:
    https://seekingalpha.com/article/314510-the-best-buy-write-closed-end-funds
  • msf
    Nice find, and an interesting question.
Sign In or Register to comment.