For 30 years, investors have taken such things as interest rates and market volatility for granted. But now, there are a myriad of challenges facing investors.
“There’s just a ton of risks out there,” said Brian Kelleher, chief revenue officer of Simplify, citing not just rising interest rates and inflation, “but geopolitics as well.”
To protect portfolios against inflation, for example, Kelleher told VettaFi’s editor-in-chief Lara Crigger at Exchange: An ETF Experience 2022 that managed futures is one possible tool. Launched in March, the Simplify Managed Futures Strategy ETF (CTA ) seeks long-term capital appreciation by providing investors with a systematic long/short managed futures strategy, investing across U.S. and Canadian commodities and rates while excluding equity futures to ensure low correlations with equity-dominated portfolios.
In addition to high inflation, investors are also “worried about how their bond positions and their portfolios are going to be impacted by rising rates,” according to Kelleher. “So, having some way to hedge that is something that we’ve been able to bring to market with Simplify’s interest rate strategy.”
To address this concern, Kelleher pointed to the Simplify Interest Rate Hedge ETF (PFIX ), which offers exposure to domestic fixed income while using options to hedge against downside risk.
Kelleher also noted the “real potential for equity volatility… So, having different ways to protect the equity portion of portfolios with different hedges built into exposures is something we’re really focused on.”
“In major market sell-offs, you find that asset classes that don’t seem correlated tend to be correlated,” Kelleher said. “So, when you’ve built this very nice portfolio of assets that look like they’re all different, and all of a sudden they’re all selling off together, it can be catastrophic for Investors.”
Kelleher explained that having truly non-correlated assets that “offer some downside mitigation is critical.” So, Simplify has “focused on building those hedges within different types of exposure on top of the beta.” This will allow the beta to perform while the tail hedges will provide the downside mitigation.
Kelleher also told Crigger that his favorite ETF within Simplify’s suite is the Simplify US Equity PLUS Downside Convexity ETF (SPD ), which is 98% core equity exposure and 2% to 3% a portfolio of protective puts “that looks to mitigate that downside participation in major market sell-offs.”
“Most investors have a tremendous amount of exposure to U.S. large cap equity, so that’s the biggest part of people’s portfolios that they should really think about insulating,” Kelleher added.
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