Bond, Bruce Bond, Launches managed floor ETFs
Bruce Bond, the legendary founder of PowerShares and one of the highest IQ individuals in the ETF industry ( some would question, how high this is as a bar) , has filed prospectuses for two actively managed ETFs that put floors on how much money investors can lose.
The first of these two funds targets the S&P 500. The second follows the Nasdaq 100.
Both ETFs use options to build floors that stop investors losing more than 10%. These floors are built by constantly purchasing out-of-the-money one year put options. The options strategies are designed by Parametric, the Eaton Vance subsidiary. To offset some of the losses incurred from buying puts, the fund will sell two-week call option.
The fees are not yet specified, but as actively managed funds we’d guess they’d be around 1%.
Bernie’s commentary – this will work
The defined outcome (“Buffer”) ETFs that Bruce Bond pioneered several years back have been a marvel. These ETFs use options to set floors and ceilings on what investors can earn – in so far as they get in before the defined period. (i.e. maximum gain of 10%, minimum loss of 15%). To be helpful, Innovator labelled them all by month, so investors know when they have to get in.
The defined outcome ETFs raked in billions in AUM collectively. They were so successful that First Trust came along and copied them all. (First Trust and Innovator work just down the road from each other in Wheaton, Illinois).
These products – which put in hard floors – are the next logical step for Innovator.
The difficulty in using options in an ETF of course is that you get a very different outcomes depending on the time that you into the ETF. This is because the prices of the options the ETF holds move around, giving investors who buy in on different days different outcomes. Thus, the only way realistically that you can run a strategy that gives a hard 10% floor for all investors is discretionary trading (active management).
My gut feel is that there will be a real market for these – just like there is for the buffer funds. I’ve always enjoyed watching Bruce Bond build ETFs. He’s got a genius for product like no-one else.