How Derivatives Can Change Market Dynamics

How Derivatives Can Change Market Dynamics

The ETF industry has entered a new area of ​​opportunity.

A regulatory change by the Securities and Exchange Commission last year opened up the use of derivatives to investment vehicles such as exchange-traded funds. Previous regulations limited how funds could offer products with “potential future payment obligations”.

Simplified ETFs take advantage of rule changes. Paul Kim, CEO and Co-Founder, joined CNBC’s “ETF Edge” to discuss how.

“We are trying to democratize access to sophisticated capabilities and portfolio tools that were traditionally only available to larger institutional investors, such as hedge funds, such as access to over-the-counter derivatives,” Kim said on Monday.

Two of Simplify’s ETFs that aim to achieve this goal are the QQC Nasdaq 100 Plus Convexity ETF and the QQD Nasdaq 100 Plus Downside Convexity ETF. Both mirror the Nasdaq 100, while also deploying an options strategy to offset the selloff. They have been active since December and are up 7% this quarter.

“You opened up the last barriers that separate the ETF vehicle from other vehicles – so if the hedge fund vehicle had taken advantage of the greater flexibility to use leverage and use derivatives to be more flexible and nimble, then now ETFs [can]Kim said.

Dave Nadig, director of research at ETF Database, on Monday called these derivative ETFs “one of the most interesting things happening in the ETF industry.”

“Most of the exciting product innovations use multiple asset classes to generate new return models. We don’t need more vanilla equity funds, we don’t need more vanilla bond funds, we don’t need people trying real solutions. There is a need to find better solutions for problems such as income generation, ”Nadig said.

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