Today’s bull market is anything but normal; investors are faced with low-rates and stubbornly bullish momentum amid a global pandemic that could flare up again, all the while waiting for the upcoming US presidential election.
This unique environment has spurred mass adoption of structured-outcome ETFs.
Responding to that demand, TrueMark Investments, a provider of actively-managed ETFs, recently launched the TrueShares Structured Outcome September ETF (SEPZ), which is the third fund in its series of Structured Outcome 2.0 ETFs.
SEPZ’s structure allows for the potential of an asymmetric return profile. The fund seeks to provide investors with returns (before fees and expenses) that track the S&P 500 Price Index, while seeking to provide a buffer of 8-12% on that index’s losses over the fund’s one-year investment period. In practice, the fund adviser will target the buffer at 10% of index declines over the investment period following the first day of trading while also allowing for uncapped upside participation. SEPZ’s expense ratio is 0.79%.
Michael Loukas, CEO and Principal of TrueMark Investments, caught up with ETF Trends to discuss its structured outcome ETFs.
What are the challenges facing buy-and-hold investors today?
Michael Loukas: Volatility and uncertainty have made huge comebacks in 2020. This year has served as a stark reminder that emotional fortitude, discipline and patience are still very much part of the investment equation. Buy-and-hold investors are believers in the power of long-term, compounded returns, and rightfully so, but those returns are not linear, they come in chunks. The ability to weather volatility and exercise the discipline necessary to harness the power of those non-sequential returns over the long-term is largely predicated on effective portfolio construction. What does that portfolio look like? What portfolio construction tools and components are available in the marketplace? What level of growth does an investor need to achieve their goals, and how much of that upside is sacrificed to dampen volatility? Answers to these questions are paramount to successful buy and hold investing.
Why is today’s market environment ripe for structured-outcome ETFs?
Michael Loukas: Structured Outcome ETFs are a versatile and effective solution to many of the questions posed above. The combination of volatility and an extreme low-rate environment has compelled investors and advisors alike to re-examine their volatility management methods and portfolio allocations. ETFs like SEPZ offer an approach that can allow higher equity exposure, and potentially much needed capital appreciation, without taking on the full volatility profile of equities, which is extremely elevated in current markets. The ability to do it in a liquid, cost efficient and relatively tax efficient wrapper makes Structured Outcome ETFs an even more attractive portfolio tool for both long-term and tactical investors.
What are the most popular use cases for these type of ETFs?
Michael Loukas: Structured Outcome ETFs are extremely versatile. They’re being effectively used to augment traditional 60/40 and 80/20 asset allocation models, particularly in the type of low rate environment that causes the yield portion of the asset allocation to underperform expectations. Risk-parity approaches, low volatility equity sleeves and even core equity holdings have all been driving an increase in popularity as well.
Drawbacks to 1st generation structured-outcome ETFs; what makes 2.0 different?
Michael Loukas: TrueShares Structured Outcome ETFs are built on the premise that US equities have a positive return bias over the long term. As such, one of the most distinct differences is the uncapped upside participation feature versus the capped approach of many of our peers. The uncapped approach also allows for a relatively tighter correlation between the ETF share price and the valuation of the underlying index during upward moves, which is beneficial to tactical investors. As we’ve discussed, capturing outsized upside returns is vital to long-term, compounded performance. Historically, sharp upward moves happen far more often than one might think. Knowing when those lumpy returns will come is the challenge. The built in downside buffer helps dampen volatility, allowing an investor to maintain equity exposure during times of market uncertainty, keeping them in position to benefit from upward momentum when it arrives. For example, day 1 investors in SEPZ benefited from a targeted 12 month return profile that combines a 10% downside buffer with 87%-89% upside capture. While these ranges vary with each monthly series, we believe that type of investment profile represents an attractive volatility profile.
For more information, visit https://www.true-shares.com/SEPZ.