The ETF wrapper has provided issuers a powerful tool for a growing diversity of ETF strategies, and few fund types have benefited as significantly as options ETFs. VettaFi’s Alternatives Symposium took on that topic and the growing ETF category Thursday, with leaders from firms like Fidelity Investments taking part. Specifically, Fidelity Investments fund manager Eric Granat joined VettaFi senior industry analyst Kirsten Chang to discuss the firm’s view on options ETFs.
Why look to options ETFs right now? While equities markets remain a robust provider of portfolio growth, significant downside risks do still loom. Tariff uncertainty, concentration risk, and even geopolitics present a real source of concern, especially following the year’s rocky start. Options ETFs that can cap downside, whether via added income or a variety of calls and puts, have intrigued.
Fidelity Investments & Options ETFs
The symposium saw Chang invite Granat to chime in not only on the market outlook, but also Fidelity’s ETF offerings to respond. Granat opened by addressing whether the market has more room to grow, or whether upside may be more limited ahead. In his view, he said, certain metrics like the VIX index are indicating some notable uncertainty.
“We’re currently trading around 15 to 16 range in the VIX,” he said. “That tells me that … investors are still uncertain, and I think that makes a lot of sense.”
“I think that we’re living in a U.S. equity market in particular that’s potentially exposed to a greater percentage of exogenous stocks,” he added. “It sure is a fantastic backdrop to manage equity exposure and the risk attributes of those equity exposures with option strategies.”
See more: Building a Diversified Portfolio With Fidelity ETFs: A Step-by-Step Guide
Fidelity Investments offers three different ETFs within that options ETF category, Granat explained. First, the firm offers FHEQ, the Fidelity Hedged Equity ETF, which charges a 48 basis point (bps) fee.
“This is a strategy that I think of as a tail risk strategy,” Granat said. “We are looking to be more defensive to shorten the depth and duration of market drawdown events like we experienced between February and April.”
The strategy provides an “explicit cost model,” providing 140 to 150% notional coverage of its portfolio with puts. By avoiding upside truncation, which comes with short calls that cap upside, it can also do well when markets rally. That provides an alpha opportunity for that fund relative to Fidelity Investments’ peers, he said.
FYEE & FBUF
Next, the firm also offers downside protection even when the market is just down 2% or 3%. That option, the Fidelity Dynamic Buffered ETF (FBUF), charges a 48 bps fee, as well, limiting upside but offering a “smoother ride,” Granat said.
Finally, the firm also offers the Fidelity Yield Enhanced Equity ETF (FYEE). This fund charges just 28 bps for its approach, offering a “high level of monthly or quarterly distributed income,” Granat explained.
“FYEE is, again, that long S&P 500 exposure, plus a very actively managed, rules-based call selling strategy that aims to produce 6–8% of annual yield from the options a year,” he said.
Chang asked Granat to explain a few important notes for advisors relative to the funds. For example, she asked, should the funds be considered as substitutes for fixed income? Granat noted that the ETFs do provide more risk than a traditional fixed income allocation. So, while not a direct replacement to fixed income, they can fit “in between” fixed income and equity allocations.
Closing Thoughts
In closing, Granat emphasized that the firm looked to set itself apart from rivals on a few key points with its options ETFs suite. For one, he said, they aimed to limit entry and exit cost.
“So, can we create a strategy … so that if someone buys one of our strategies today versus someone a week or two down the road, they’re going to get basically equivalent risk attributes in the portfolio,” he explained.
Second, he said, the shop’s strengths in U.S. options, expiries, daily options, and more in the space helps it do well for clients.
“I think that’s where we’re positioning and preparing for, and it’s also a little bit about how we think we can be different, [and]differentiate the shareholder experience of our products relative to some peers,” he noted.
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Fidelity Investments® is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not form any kind of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the articles herein. VettaFi LLC is the author and owner of these articles.
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