Today, Simplify rolled out an actively managed ETF that features an options overlay. The Simplify Hedged Equity ETF (HEQT) holds ETFs tracking the S&P 500 and applies a put/spread collar strategy by buying put options and call options on the underlying index or the ETFs.
HEQT comes with an expense ratio of 0.53% and lists on the NYSE Arca.
According to the prospectus, the put option spread is designed to protect the fund from a market decline of 5-20%, while the call options provide premium income. The call options also mean that HEQT gives up some of it potential upside performance.
Simplify CEO Paul Kim says the put spread collar strategy is typically seen in mutual funds and typically offers investors lower volatility. He adds that the fund rebalances one-third of its portfolio during each month of a given quarter, spreading out rebalancing risk in a way that a fund that rebalances once a quarter does not.
Kim notes that the investment arguments for bonds and low volatility equity strategies have typically been driven by correlations data and that they fall apart when the asset class in question no longer behaves as it used to. Low volatility performance holds a great deal of appeal for the baby boomer generation as it enters retirement.
“For investors near or in retirement, it becomes a very attractive, much-lower-risk core equity sort of position,” Kim said, noting that the strategy is expected to provide an upside return in the high single digits to low double digits but with much less downside risk than equities.
“[HEQT is] sort of threading that needle. It looks a lot like a balanced fund as the end result, except you don't have to rely on bonds to get there,” he added.
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