ETF development reached new heights in 2023, with active strategies in particular taking a big leap forward. Active’s flagship year in 2023 saw active funds pick up big flows, but also set off a ton of new active product development. While plenty of ETFs remain further back in the development process, Morgan Stanley’s shop Parametric have already joined the fun, launching two new active liquid alts ETFs in late 2023.
See more: How Options-Selling ETFs Can Enhance Performance
The two strategies, the Parametric Hedged Equity ETF (PHEQ) and the Parametric Equity Premium Income ETF (PAPI) both invest actively, and combine an equity piece and an option overlay, per Parametric’s Alex Zweber. Zweber, managing director of investment strategy at the firm, sat down with VettaFi at the ETF Exchange last month to discuss.
“We really just want to get the word out about our capabilities within the ETF vehicle,” Zweber said. “I think a lot of people know Parametric, they know the things we can do custom indexing portfolios and options,”
“They’re things we’ve been doing for decades,” he added. “But it’s new in the last few months within the ETF vehicle.”
Active Liquid Alts ETFs: Diversification in Active Funds
PAPI and PHEW both charge 29 basis points (bps). PAPI invests in dividend payers from the Russell 3000 index with its active approach. IT looks for broad diversification, equal weighting sectors and then equal weighting the top stocks in each sector.
It also writes systematic, short-dated out-of-the-money call options in tranches with staggered expiration dates. Those options, which may include FLEX options, help the ETF offer some significant income for its investors.
PHEQ, meanwhile, looks to mitigate losses with a laddered options strategy while actively investing in large-cap stocks. The strategy purchases and sells put options and call options, giving up on some upside potential. Adding other options over various periods, it creates four different defined outcome periods per year within the strategy.
The pair of active liquid alts ETFs can offer a notable source of diversification to traditional stock and bond investments, Zweber said. Zweber, who took part in a panel discussion about the Magnificent Seven during the conference, also noted that the strategies can provide options to deal with concentration risk via income and downside protection. Zweber pointed to the ETFs’ low fees and their value to investors who may need income.
“I think in particular, the income focused strategy will have (interest from) an aging population, people looking for more income source strategies,” Zweber said. “Especially where they’re tax efficient. I think there’s going to be a ton of appetite for that.”
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