Latest Single-Stock ETF Offers Hedged Exposure

July 25, 2022

[Editor's Note: This story was updated with the actual cap rate on launch date.]

 

The first batch of U.S.-traded leveraged and inverse single-stock ETFs is only two weeks old, but some market watchers have already expressed concerns over potential volatility of such products.  

On Tuesday, Innovator ETFs, the issuer that was first to market with defined outcome ETFs, expects to roll out an ETF designed to provide hedged exposure to Tesla Inc., one of the largest and most widely traded stocks—as well as single-stock ETFs—trading on the U.S. market.  

The Innovator Hedged TSLA Strategy ETF (TSLH) will, like a defined outcome ETF, use Flexible Exchange (FLEX) options on Tesla stock to offer investors exposure to the stock’s upside performance up to a cap, estimated to be 8.7% before expenses, while protecting against losses of more than 10%.  

The new fund comes with an expense ratio of 0.79% and lists on Cboe Global Markets. 

“For those investors with a lower risk tolerance who still desire exposure to the potential capital appreciation of one of the most inventive entrepreneurs and leading disruptors in the global economy today – as well as those longtime shareholders who have seen substantial gains in TSLA and would like to take some gains yet still have upside exposure, or who wish to put new money to work but in a risk-managed fashion – we’re excited to bring this investment strategy to market,” said Innovator ETFs CEO Bruce Bond in a company statement on Monday. “TSLH will list as the first ETF ever to provide long exposure to a single stock with built-in risk management.”  

The portfolio will involve a 10% allocation to a call option spread on the stock using the FLEX options, while the remainder of the portfolio will consist of Treasury bills. The caps and floors will be reset quarterly.  

Innovator currently offers a lineup of roughly 70 ETFs with defined outcome strategies that are tied to various major stock indexes. TSLH could be the first of a series of new products. There are currently leveraged and inverse ETFs in registration that are tied to about 35 different equities.  

The issuer originally projected that the fund would come with a cap of 8.7% before expenses. At launch on July 26, the fund had an actual cap of 9.29%, before fees. The cap is effective through Sept. 30, 2022, when TSLH will reset. Since the fund launched in the middle of the quarter, it is subject to a prorated fee of 0.15%, which brings the post-fee cap to 9.14%.

 

Contact Heather Bell at [email protected] 

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