New exchange-traded funds (ETFs), especially with a thematic focus, have been regularly entering the market. Today, we'll introduce two actively-managed funds recently announced by Simplify Asset Management.
To achieve upside objectives and manage risk, these new funds utilize option strategies via calls and puts.
As we discussed recently, calls enable holders to participate in the up moves in the underlying asset, such as shares of ETFs. On the other hand, puts can be used to protect against drops in the price of the underlying asset. Therefore, it is a hedge against a potential correction in the asset at hand.
But there are no free lunches on Wall Street. Call and put buyers pay a premium for the hedge (or the speculative move), and all options have expiry dates. In other words, if the expected outcome does not materialize by that day, then the option holder could potentially lose all of that premium.
The two new funds discussed below typically use out-of-the-money (OTM) options, which would be suited to capture the extreme (or "tail") events in the underlying securities. If the underlying asset has a big move, then the options are likely to see high returns.
As Kshitij Prakash of Graham Capital Management explains:
"In statistics, ‘tails’ are defined as the extremes of a distribution (i.e., those outcomes that have a small probability of occurring). In finance, the term tail events typically refer to infrequent, outsized ... market moves."
These funds might appeal to investors expecting increased volatility and big price moves in the stocks held in these funds but who do not want to personally set up trades using derivative products.
1. Simplify Volt RoboCar Disruption and Tech ETF
Current price: $13.78
52-Week Range: $12.48 - $15.76
Expense Ratio: 1.09%
The Simplify Volt RoboCar Disruption and Tech ETF (NYSE:VCAR) focuses on the top names expected to become disruptive forces in autonomous driving. The fund enhances the concentrated exposure with options.
Fund managers' chosen company in the sector is Tesla (NASDAQ:TSLA), as they believe the company is currently undervalued. The auto-maker is VCAR's top holding, with about 25% target allocation, split between a 15% stock position and a 10% call option position. However, these amounts could change. For instance, currently, the fund's 15.82% is in Tesla stock, and 17.47% is in Tesla out-of-the-money (OTM) call options.
In addition to TSLA stock, the ETF has invested in Invesco QQQ Trust (NASDAQ:QQQ) and the Invesco NASDAQ Next Gen 100 ETF (NASDAQ:QQQJ). The respective allocations are 35.70% and 26.59%.
We previously discussed QQQ and QQQJ. Simply, QQQ tracks the returns of the companies in the NASDAQ 100 index. QQQJ, on the other hand, invests in the 101st to the 200th largest companies listed on the NASDAQ exchange.
In addition to these long positions, the ETF typically buys OTM put options to potentially protect the fund from a broad market selloff, especially in tech shares. The current OTM put options, which make up 4.06% of the fund, are on the NASDAQ 100 index, with various expiration dates in 2021. The rest of the fund is in cash (0.36%).
The main aim of such call and put option strategies in VCAR is to capture the big up moves in Tesla and the big down moves in tech shares. By owning the underlying shares in Tesla, QQQ and QQQJ, the fund is also long both Tesla and the broader tech market.
VCAR started trading in late December 2020 and currently has close to $3 million under management. In other words, it is a young and small fund without much trading history. Year-to-date, the ETF is up more than to 2%.
By comparison, TSLA, QQQ and QQQJ are up around 10%, 6% and 11%, respectively. Thus, neither one of the two extreme moves (i.e., an up move in Tesla and a down move in tech) that the fund aims to capture has happened since inception.
However, it does not mean that it will not happen in the coming months. Over the past 12 months, Tesla moved up fast and returned more than 380%. Similarly, a year ago, we witnessed rapid slides in broader markets, including tech shares. In the case of such potential moves in the future, a fund like VCAR would likely benefit. So would investors who are interested in holding Tesla for the long-run, but are nervous about big declines in tech.
2. Simplify Volt Pop Culture Disruption ETF
Current price: $13.50
52-Week Range: $12.11 - $13.94
Expense Ratio: 1.03%
The Simplify Volt Pop Culture Disruption ETF (NYSE:VPOP), another thematic investment product, has a similar approach to VCAR. Fund managers expect several firms to be the disruptive names in the media sector. The top two companies they have identified are Spotify Technology (NYSE:SPOT) and Snap (NYSE:SNAP).
The fund’s allocation in those names is 20.77% and 17.82%, respectively. Another 28.76% of the fund is also in QQQ.
Other names include Peloton Interactive (NASDAQ:PTON), Walt Disney (NYSE:DIS), Activision Blizzard (NASDAQ:ATVI), Netflix (NASDAQ:NFLX) and Facebook (NASDAQ:FB). Each company has an allocation of less than 5% in the fund.
Similar to Tesla OTM call options in VCAR, VPOP currently holds OTM call options in SPOT and SNAP, with different expiry dates over the next 12 months. These call options are bets that either stock might have a big up move during the year.
As a hedge against a potential large slide in broader tech shares, VPOP also has OTM put options with different expiry dates on the NASDAQ 100 index.
The fund began trading in late December 2020 and assets under management are around $1.4 million. Since the start of 2021, VPOP has returned more than 9%. By comparison, SPOT and SNAP are up about 27% and 22%, respectively.
Investors who believe digitalization and online entertainment will drive growth in either company might want to keep an eye on VPOP.