New ETF Offers Options Collar Strategy

Aptus Capital Advisors launched its fourth ETF today, an actively managed options-based strategy designed to provide income and downside protection. The Aptus Collared Income Opportunity ETF (ACIO) uses a collar strategy for each of its equity holdings as its primary strategy.

ACIO comes with an expense ratio of 0.79% and lists on Cboe Global Markets, parent company of ETF.com.

“There’s really not a lot of efficiently priced and efficiently positioned collared strategies out there,” said JD Gardner, co-founder and managing member at Aptus.

“There’s not a lot that’s attractive about fixed income, especially in an environment where the 10-year is at 2%, and there’s less and less to be excited about in the equity markets just from a pure valuation standpoint,” he added, noting there are times when investor focus should be on returns and times when it should be on risk management.

In the current environment, Gardner says Aptus believes investor focus should be on risk management, and ACIO is designed for that purpose.

Investment Approach

The fund holds roughly 30 large cap U.S. stocks that are selected based on their dividend yield, among other qualities, and applies an options collar strategy to each security.

In a collar, the investor buys an out-of-the money put option on the stock and sells an out-of-the-money call option on the same stock, with the anticipated result being that the put option protects against a decline in the stock and the call option provides some income in the form of the premiums.

The main disadvantage of such a strategy is that it limits the gains the investor can see, should the portfolio’s underlying equities see significant upside.

To address the limited upside, Gardner says the fund will also invest in derivatives on securities like the SPDR S&P 500 ETF Trust (SPY) to enhance the portfolio’s returns.

“We’re shooting for a drawdown in the single digits. We’re anticipating the beta of the fund to be less than 0.4,” Gardner said. “We’re focusing on higher-yielding stocks, and that includes ADRs such that there is consistent and repeatable yield coming off the portfolio, and then we have the collar there for added protection.”

Risk Management Key

He notes that investors can generate return in one of three ways: yield, growth of earnings and multiple expansion. Gardner points out that yield is currently hard to find, while growth is slowing and multiple expansion doesn’t make much sense in the current environment.

“In this kind of environment, we’re really trying to construct portfolios where risk management is key and where we’re really controlling what we can control in terms of where our return is going to come from,” he added.

The firm offers three other ETFs under the Aptus brand, with the largest being the $116 million actively managed Aptus Defined Risk ETF (DRSK), which combines exposure to U.S. corporate bonds and call options on U.S. large cap stocks.

Contact Heather Bell at [email protected]