The thinking behind the design of the package was to provide investors with a hybrid proposal to the traditional 60/40 package.Īs bond yields have been depressed, finding that yield to shore up an underlying portfolio has been increasingly difficult. An interesting proposition!Īs previously emphasized, the fund's composition is predominantly made up of fixed income securities against which call options are used to provide some degree of leverage. This would accurately describe how the fund positions itself in the ETF space - something akin to a boosted US corporate debt ETF propelled by any active returns generated by long call options. Returns have understandably remained below what a typical fully fledged equity ETF would deliver while being above what you would find in an all-inclusive corporate bond offering. This unique strategy provides some degree of leverage and exposure to large-cap US equities using derivatives, which makes the product somewhat standalone. In some instances, options on ETFs tracking large-cap stocks will be used as a substitute. The call options are purchased on a handful of large-cap stocks, which are chosen for momentum and growth potential. The remaining part, between 5% and 10%, is used to buy call options on US equities.Ĭharacteristics of the call options include 6-month maturities, purchased at the money, which are then rolled over on a quarterly basis. The fixed income component of the package is comprised of "bullet maturity" ETFs to build exposure to credit markets which it holds until maturity, rolling each one to later dater maturities as they come to term. Hence, the product name - defined risk which is a terminology typically used to characterize long positions on options, in this instance, call options. Predominantly comprised of US-denominated medium duration (7-8 years) investment-grade corporate bonds (90%-95%), the fund retains the equity "kicker" expressed through long call options on US equity. This is where hybrids play their part - not delivering the returns of equity, but harboring less risk, special ETF constituents, such as the use of options, can provide an interesting investment proposal.Īptus Defined Risk ( BATS: DRSK) affords investors the possibility of both fixed income and equity exposure through its hybrid structure. A yield-less bond market matched with equities at all-time highs paints a worrying picture, specifically for the more risk-averse investor.
I remain upbeat about how this ETF style could play a meaningful role - especially in the present environment. A lot have comparably ordinary attributes or bog-standard investment objectives - this one, however, remains very much left of center field, comprised almost wholly of medium-duration investment-grade corporate debt, it matches this with long at-the-money calls on US equity. For some time, I have been studying exchange-traded funds hunting for opportunities which cater to distinct investment mandates. Some investor protection advocates aren’t so sure.I recently discovered this ETF offering, and it surprised me by its features. Gensler’s meme-stock reforms are meant to help retail traders. oil refiners looking at ‘record’ Q1 profits ahead of peak summer season
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