Simplify Asset Management, a New York-based specialist in options-based investing, has launched two new ETFs deploying advanced hedging strategies.
Paul Kim, CEO and co-Founder of Simplify Asset Management.
The Simplify Interest Rate Hedge ETF (PFIX US) is designed to provide protection against a sharp increase in long-term interest rates, while the Simplify Volatility Premium ETF (SVOL US) delivers income through a short volatility strategy while managing tail risk.
The funds have listed on NYSE Arca and come with expense ratios of 0.50% each.
Commenting on the launch, Paul Kim, CEO and co-Founder of Simplify Asset Management, said: “We could not be more excited to be adding PFIX and SVOL to our fund family. ETFs are a great democratizer and we’re thrilled to be making the sophisticated strategies underpinning both of these new funds available to the marketplace.”
Interest rate hedge
The Simplify Interest Rate Hedge ETF has established a hedge against rising long-term interest rates by purchasing a 7y20 payer swaption struck at 4.25%. This is a liquid over-the-counter derivative that gives Simplify the option in seven years’ time to enter into a swap contract based on the 20-year US Treasury bond yield. As it is a payer swaption, Simplify would pay the fixed rate (4.25%) and receive the floating rate (the prevailing 20-year US Treasury bond yield in seven years’ time).
The swaption will be profitable at maturity if the 20-year Treasury yield is above 4.25% (as of 18 May, the 20-year Treasury yield is 2.27%). Of course, the value of the swaption fluctuates daily based on changing market expectations – a sharp increase in expected future interest rates would lead to an immediate increase in value for the swaption and the ETF.
According to Simplify, the swaption’s strike price, time to expiry, and underlying rate maturity were carefully selected in order to create a powerful hedge while keeping costs low.
Harley Bassman, Managing Partner at Simplify Asset Management, said: “Portfolios today are too often overexposed to interest rate risk and the impacts from a re-emergence of inflation, but hedging portfolios against these risks has long been challenging as traditional hedges, like futures, come with large costs of carry, while more sophisticated approaches, like interest rate derivatives, have only been available to institutional investors.
“With PFIX, investors now have a tool that can be used as an explicit hedge against rising rates for all the parts of a portfolio that tend to struggle in a rising rate environment, including high quality long-dated fixed income, real estate, and growth equities.”
Volatility premium
The Simplify Volatility Premium ETF, meanwhile, establishes approximately a 25% daily short position on the S&P 500 VIX Short-Term Futures Index. According to Simplify, this level of short exposure balances the trade-off between maximizing income and minimizing drag from high volatility.
The fund also dedicates a modest option budget to purchasing deep out-the-money call options on the index which serve to protect against extreme spikes in the VIX.
Distributions are made to investors on a monthly basis.
Michael Green, Portfolio Manager and Chief Strategist at Simplify Asset Management, said: “Investors searching for income in today’s market have to navigate the twin challenges of historically low bond yields and highly volatile equity markets. These market conditions do, however, make the volatility risk premium an interesting potential source of income, one made all the more appealing with the approach captured in SVOL which strives to reduce the risk of substantial tail events.
“We’re very excited to be bringing this first-of-its-kind strategy to market and see SVOL as a key solution for investors looking for alternatives to the usual high yield approaches, diversifiers for traditional asset classes, and as a tactical vehicle for those times when volatility levels are most attractive.”