Simplify Asset Management rolled out two actively managed funds implementing derivatives strategies this week. The first, the Simplify Interest Rate Hedge ETF (PFIX), started trading on Tuesday, while the second, the Simplify Volatility Premium ETF (SVOL), launched today.
PFIX and SVOL both have an expense ratio of 0.50% and both funds list on the NYSE Arca.
Digging Into PFIX
PFIX looks to protect investors against steep upturns in long-term interest rates by investing in derivatives like swap options, otherwise known as “swaptions,” which are mainly available to institutional investors. The fund can also invest in interest rate options, Treasury securities—including Treasury inflation-protected securities—and ETFs that hold Treasury securities or investment-grade bonds, according to the prospectus.
A press release from Simplify says that about half PFIX’s portfolio at launch is allocated to a long-dated options contract on long-term interest rates, and that the fund seeks to build a “low-cost, powerful and highly convex position.”
“We believe that payer swaptions are one of the most—if not the most—efficient ways to hedge duration,” said Simplify CEO Paul Kim. “It’s a very liquid market, and in terms of the cost of carrying that hedge, it’s very efficient relative to things like using Treasury futures or shorting bonds or buying puts on ETFs.”.
“The intention of it is to provide a way for investors to hedge their portfolio using very institutional-caliber, very efficient … instruments that can—not just perform when they go up but— actually go up enough to return enough to cover an entire portfolio’s duration risk,” he added.
Kim says that by buying put options on interest rates, the fund makes a linear return while protecting the entire portfolio, describing it as a “very potent hedge.”
SVOL Hedges Volatility
SVOL, on the other hand, seeks to protect investors against volatility, which it does in a fairly complex way. It looks to provide a return that is roughly equal to -0.2x to -0.3x of the performance of the S&P 500 VIX short-term futures index, with a daily reset. The portfolio includes an allocation to an options overlay designed to protect the portfolio when the VIX actually spikes, the prospectus says.
“SVOL takes advantage of the attractive carry in the volatility curve, specifically the VIX curve,” Kim said, citing 2018’s “Volmageddon,” when the VIX spiked sharply and resulted in the implosion of some ETFs tied to the index.
“Every now and then, a volatility spike can unwind years of return—which is why it carries so well, because it’s got this massive risk premium built into it,” he explained. Kim notes that a quarter of inverse VIX exposure is still quite attractive given that -1x exposure to the VIX has had an annualized carry of 100%.
“We’ve also added on a layer of call options on the VIX, so if there’s a big volatility spike, not only are we trying to protect the portfolio, we may even be able to profit from that VIX spike. [SVOL has] two guardrails on a very attractive carry engine,” Kim said. “In a world where people are searching for yield and income, this is what we believe is one of the most attractive sources of carry out there.”
Simplify’s goals are to provide institutional and hedge-fund-style derivatives strategies in an ETF wrapper and democratize access to alternative strategies that would normally require millions of dollars of investment to simply get a foot in the door, Kim says.
Contact Heather Bell at [email protected]