Today Aptus Capital Advisors is launching its third fund. The actively managed Aptus Defined Risk ETF (DRSK) invests in a combination of U.S. debt and options on U.S. equities.
The fund comes with an expense ratio of 0.78% and lists on the Cboe BZX Exchange, which is owned by ETF.com’s parent company Cboe Global Markets.
DRSK invests 90-95% of its portfolio in a combination of investment-grade corporate debt primarily via target-date maturity ETFs that are laddered across seven to eight years and generate monthly income. That portion of the portfolio will be rebalanced quarterly, according to the prospectus.
J.D. Gardner, a co-founder and managing member of Aptus, says the fixed-income portion is basically an equally weighted portfolio of investment-grade bond ETFs from iShares’ iBonds lineup.
The remaining 5-10% of the portfolio is invested in at-the-money call options on 10-12 large-cap U.S. stocks or on U.S. large-cap ETFs. Call options are generally used to generate income.
The fund basically looks to solve the issue on many investors’ minds over the last few years: income. Aptus notes that current fixed-income portfolios may not even keep up with a retiree’s withdrawal rates. Increasing duration risk is often not sufficient, while adding credit risk can turn the fixed-income allocation into an equitylike investment.
“We’ve talked to hundreds if not thousands of advisors by this time, and over the last year and a half, we’ve heard a few repeated things in terms of issues with portfolio construction. One of the biggest is fixed income. Not a lot of people are very excited about the fixed-income market,” Gardner said, noting that’s due mainly to the anticipation that interest rates will rise.
“All we’re trying to do is take an asset class we feel is somewhat forced in terms of portfolio construction—you have to have it for volatility reasons, but you’re building in a big zero in terms of expected return, most likely for the foreseeable future,” he added, pointing out that the options portfolio can provide a boost to returns, but that the risk taken to do that is very defined and calculated.
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