Validus Risk Management has made its ETF debut with the launch of a rules-based put-write strategy based on the S&P 500 that is designed to help improve investors’ long-term risk-adjusted exposure to US large-cap equities.
Kambiz Kazemi, Chief Investment Officer at Validus Risk Management.
The Cboe Validus S&P 500 Dynamic PutWrite Fund (PUTD US) has been listed on Cboe BZX Exchange with an expense ratio of 0.60%.
The ETF is linked to the Cboe Validus S&P 500 Dynamic PutWrite Index which Validus developed in collaboration with derivatives exchange and options investing specialist Cboe.
The index essentially delivers a cash-secured put-write strategy which involves selling put options on the S&P 500 while simultaneously holding enough cash or cash equivalent securities (such as Treasury bills) in an amount equal to the maximum possible loss of the short put positions. The strategy is, therefore, fully collateralized and does not utilize any leverage.
Cash-secured index put-write strategies have historically been used to boost income from a holding of Treasury bills. The approach typically exhibits a lower risk profile compared to its related index and tends to outperform that index when stock markets are in range-bound or bearish regimes, (such as in 2008 and more recently in 2022) while tending to underperform in bull market regimes (such as from 2012 to 2014, and in 2019).
The new ETF’s underlying index is, however, distinct from traditional cash-secured put-write strategies in that it harnesses proprietary analytics from Cboe and Validus to dynamically select put option strike prices based on current levels of market volatility. This contrasts with traditional approaches that tend to consistently select strike prices that are either at-the-money or slightly out-of-the-money.
Validus notes that, since the index’s inception in July 2022, the strategy has outperformed 96% of the time when the S&P 500 experienced a negative daily return.
According to Validus, while the ETF does deliver a source of income that is uncorrelated with conventional sources of portfolio yield, the fund’s dynamic put writing approach based on current volatility levels also makes it an effective tool to reduce the volatility of a long exposure to the S&P 500, thereby helping to improve investors’ long-term risk-adjusted exposure to US large-cap equities.
Kambiz Kazemi, Chief Investment Officer at Validus Risk Management, commented: “We are delighted to bring this innovative investment solution that combines decades-long option expertise from both Validus and Cboe. This strategy will allow investors to maintain a long exposure with lower volatility to the S&P 500 and the potential for outperformance in challenging markets, without sacrificing the potential for upside capture to the same extent as traditional overwrite strategies.”
Kevin Lester, Chief Executive Officer at Validus Risk Management, added: “This launch is a milestone for Validus and exemplifies our risk-centric approach to investing and our expertise in financial engineering and derivatives, building on over a decade of experience in designing hedging strategies for some of the world’s largest institutional investors. We are delighted to partner with the Cboe, the world’s leading derivatives exchange network, to create this innovative investment solution.”