BOXX: Thinking Outside of the Traditional Fixed Income Space

As the Federal Reserve remains resolved to win the battle with inflation, investors navigating the fixed-income landscape face a complex challenge. Traditional bond funds, historically a source of stability and income, have experienced historic price volatility, leaving many questioning their traditional role in a portfolio.  

Actively managed fixed income ETFs offer a potential solution, with experienced managers employing a range of alternative strategies to navigate these volatile conditions while seeking income generation in a higher-for-longer interest rate environment. 

Unpacking BOXX, a Unique Actively Managed Fixed Income ETF

A prime case of actively managed alternatives to traditional fixed income is the Alpha Architect 1-3 Month Box ETF (BOXX), which recently passed $1 billion in assets after just a little over a year since its inception. BOXX attempts to provide the price and yield performance of 1–3-month U.S. Treasury Bills. By using options, the strategy seeks to have a similar risk profile as T-Bills yet with greater tax efficiency.  

To achieve its objective of replicating what investors refer to as the risk-free rate of return, BOXX primarily uses a box spread strategy, which involves constructing synthetic long and short positions on an equity index, such as the S&P 500.  

The actively managed fixed-income ETF performed as designed in 2023, producing a rate of return of 5% while maintaining tax efficiency. Since the fund achieves this return without paying dividends or interest, investors won’t pay taxes unless they sell shares. 

BOXX’s expense ratio is 0.19% and it had $1.05 billion in assets under management as of Feb. 26, 2024. 

What Are Box Spreads?

A box spread is an options trading strategy that combines buying a bull call spread with buying a bear put spread, both using the same strike price and expiration date. It's essentially creating a defined risk, defined reward range for your investment.  

Here's a breakdown of the components in box spread: 

• Bull call spread: This involves buying a call option at a higher strike price (further out-of-the-money) and simultaneously selling a call option at a lower strike price (closer to the current stock price). This strategy profits if the underlying stock price rises significantly above the higher strike price. 
• Bear put spread: This involves buying a put option at a lower strike price (further out-of-the-money) and simultaneously selling a put option at a higher strike price (closer to the current stock price). This strategy profits if the underlying stock price falls significantly below the lower strike price. 

By combining these opposing strategies, an investor can create a defined risk zone which is the maximum loss that the investor can incur. This is limited to the premiums paid for both spreads. 

Investors can also create a defined reward zone, which is the maximum profit that can be achieved. This is limited to the difference between the strike prices used in the spreads, minus the premiums paid. 

Overall, a box spread offers limited potential profit compared to buying a single call or put option, but it provides protection against significant price movements in either direction, above or below the chosen strike prices. A box spread can be used for neutral market expectations or volatility protection. 

It's important to remember that box spreads involve multiple option contracts, which can be more complex to manage than single options and may require precise timing and execution to ensure profitability.