Safety games are in vogue as stocks extend their winning streak.
With investors seeking hedge against everything from inflation and rising interest rates to unprecedented volatility throughout the year, nearly $ 5 billion in the past 12 months has been funneled. in exchange-traded funds using options to increase or protect their returns. use.
The two new launches of Simplified could be useful for the Federal Reserve to reduce its bond purchases in late 2021, Paul Kim, co-founder and CEO of the company, told CNBC’s “ETF Edge” on Monday.
The Simplified Interest Rate Hedge (PFIX) ETF buys put options on long-term Treasury bonds, which Kim called “the most liquid and cost-effective way to get interest rate protection.” .
This is “essentially a yield targeted appeal,” he said. “This means that over the next seven years, if some will raise interest rates, this strategy is positioned to perform well and protect the entire portfolio.”
Simplify’s Volatility Premium ETF (SVOL) takes a slightly more complicated approach to extracting income from the volatility of the Cboe Volatility Index.
“How do you generate returns, returns or profits in a very low return environment?” Of course, fixed income securities are in trouble. Stocks now have low dividend yields and are priced to perfection. One of the most attractive bonuses, in our opinion. In the United States, which has yet to be fully exploited, volatility is the premium, ”Kim said.
As investors begin to integrate a portfolio security using options, “it creates a very steep VIX curve, and this strategy differentiates between the two halves of that curve,” where 20-25% is the carry. capacity, or take advantage of the difference, he said.
While major spikes in the VIX can hurt SVOL, “if the VIX spike is sharp enough, it could actually turn into a net gain in overall strategy,” Kim said. “He’s trying to cut a carry, a coupon, from a very attractive curve, but still hedge something through the use of a range of options.”
Dave Nadig of ETF Trends said that many fund managers consider such strategies to be worth the risk.
“We saw [rash] These types of products derive income from unlikely places because obviously there is nowhere else to get that income, ”Nadig said.
“In the current state of the bond market, no one really wants to hit 1.5 in 10 years,” he said, adding that the yield is currently below 1.3%. “It’s just not appealing. Advisors are looking for any type of additional income, especially for their older clients who are retired.
While nothing is as risky as buying Treasuries and holding them to maturity, PFIX and SVOL offer strategies that can at least be less risky than buying stocks, Nadig said.
“Is it risky? Well, it kinda depends on what the stock markets are doing, ”he said. “The good news here is that if the stock market is volatile and volatile, it will do what it is supposed to do and generate a lot of income for you.”