Simplify added the first fixed income ETF to its stable of funds Monday with the launch of the Simplify Risk Parity Treasury ETF (TYA). The actively managed fund seeks to match or beat the quarterly performance of an index of U.S. Treasury securities with at least 20 years before maturity by trading derivatives contracts on the asset class.
TYA trades on the Cboe Global Markets. It carries an initial expense ratio of 0.15%, which is set to increase to 0.25% once a waiver expires at the end of October 2022.
Simplify is perhaps best known for its options strategies, but the firm’s CIO and Co-founder David Berns says that, although TYA can use options, they won’t be its go-to investment vehicle. Instead, TYA will mainly rely on futures contracts and direct investments in Treasury securities to achieve its goals.
“What we’re trying to do is give people exposure to the 20+ year Treasury index, but we’re using leverage to get them there, so they need to deploy a lot less capital to get that exposure,” Berns explained.
“The 7-10 year Treasury index has a duration of around 8, and we can get you there using about a third of the capital. If you have 10% of your portfolio in 7-10 year Treasury exposure, we can give you that same kind of duration risk and benefits of not being correlated with equities, etc. with around a 4% allocation... That’s capital efficiency; that’s the primary goal: to give you the duration you want but with a third of the assets,” he added, noting that investors can take the unused capital and invest it elsewhere.
While the fund aims to match the duration of the ICE 20+ Year US Treasury Index, it also looks to capture the yield from the middle of the curve, where it tends to be greater.
“Historically, there’s actually more roll yield per unit of duration as well as coupon yield per unit of duration in the middle of the curve. So when you lever up there, you do expect to get what we call a ‘structural alpha benefit,’” Berns said, adding that bond traders have long known how to add structural alpha by creating long-dated duration using the middle of the curve.
“I think this is going to be an interesting value proposition for a lot of people who aren’t aware of this opportunity,” Berns observed.
Contact Heather Bell at [email protected]