Last week ETF newcomer VectorShares launched their first fund, the VectorShares Min Vol ETF (VSPY), an actively managed fixed income ETF that seeks to provide market-like returns with greatly reduced volatility.

VSPY holds 90% of its portfolio in ultra-short duration fixed income securities and the remaining 10% in S&P 500 call and put options contracts, a position which is never net short the market.

When interest rates are low, the fund will invest primarily in ultra-short term duration securities and when interest rates are higher, VSPY will invest in longer duration securities. As such, VSPY aims to minimize interest rate risk while offering yield opportunities, as rates potentially climb over the next few years.

The 10% options allocation, meanwhile, is designed to reduce exposure to market volatility, including potentially large losses due sinking market performance and movements. In addition, the fund also maintains a cash position in case of rapid market decline, adding another volatility hedge.

“The goal of the options is to utilize their inherent leverage to drive market like returns while the ultra-short duration fixed income dampens volatility,” said a statement on the VectorShares website. “The call and put options are automatically rebalanced based on the market levels. As the market increases in price, the long positions are decreased, and vice versus. We believe this consistent rebalance drives favorable returns for the portfolio.

VectorShares believes that the current nature of the yield curve in combination with the struggles within the fixed income space in 2021 indicate a bond bear market for the next few years. In that environment, VSPY would perform well in by harnessing  rising rates while offering better returns at reduced volatility.

VSPY was created by two college professors: Donald Flagg, PhD, and Jeff Donaldson, PhD and CFA, as well as CPA Amol Nirgudkar. DFN Management LLC currently operates two hedge funds, with VSPY being based on the more conservative hedge fund strategy.

VectorShares aims to extend further into the ETF markets in the coming years with its own set of structured ETFs that utilize proprietary hedging concepts that have been developed over the last 20 years utilizing research.