The fund purchases ETFs that track the S&P 500, seeking constant exposure to the S&P 500 Index while also purchasing and selling put options and call options in a put/spread collar approach. The options that the fund uses are either based on the S&P 500 Index or ETFs that seek to replicate the S&P 500 Index.
“Many investors struggle to stay the course with their equity investments due to volatility, but by creating a lower volatility equity exposure, those who are more risk averse can stay invested and improve their opportunities to participate in market upside,” said David Berns, Ph.D., CIO and co-founder of Simplify in the press release.
“At the same time, with bond yields near all-time lows, investors are searching for alternatives to traditional low vol investments. The possibility of reduced volatility offered by HEQT creates a powerful alternative for investors, and we’re very pleased to be bringing this fund to market,” Berns said.
By utilizing the put/spread collar, the fund seeks to offer investors downside protection with the put options while providing income with the index call options. This approach minimizes the volatility and risk that long-only strategies are prone to. The collars are set to expire over three sequential months in an effort to provide better rebalancing opportunities.
Put options are bought at a higher strike price and sold at a lower strike price, creating put option spread, while simultaneously selling a call option on the S&P 500 Index or ETF. The spread is maintained to protect the fund from a 5–20% market downturn, with options being renewed on a quarterly basis, depending on market conditions at the time.
Income is provided from the premiums obtained by writing index call options, which can also offset the option spread costs. Because HEQT uses call options, it has limited profitability in market increases as the call option is typically used once market price meets the option’s strike price.
The fund also invests in futures contracts in order to gain equity exposure and hedge the portfolio if the fund cannot purchase or write the options it needs for its overlay.
HEQT carries an expense ratio of 0.53%.
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