Let's Simplify These 3 Fund Offerings From Simplify ETFs

I am generally a fan of newer ETF issuers as they tend to have truly innovative approaches to investing and overall exemplify the best of the entrepreneurial spirit. Among them is Simplify Asset Management, which launched three ETFs to expand its suite of what it calls Downside Convexity funds. I'm going to delve into how Simplify defines Convexity and how it looks to capture it. When I think about convexity in an investing context my usual frame of reference goes back to my days in fixed-income product management. Back then I had to explain not just duration but its fine-tuned companion convexity to investors interested in what non-linear effects changes in interest rates would have on the funds they held. Simplify takes pains to outline in its prospectus that it is not talking about convexity as it relates to bonds. Simplify gets right to the mathematical root of this term and looks to model strategies that start with a broad exposure (iShares Core S&P 500 ETF , for example) and overlay option strategies that exhibit geometric payoffs. This is a slightly fancy way of saying that Simplify relies on the embedded leverage in options to hedge and/or enhance returns for shareholders. The first funds Sept. 3, 2020, saw the launch of the first three Simplify funds that outlined the basic strategies; they are the Simplify US Equity PLUS Convexity ETF , Simplify US Equity PLUS Upside Convexity ETF and Simplify US Equity PLUS Downside Convexity ETF . All these strategies start with a base exposure to IVV and portfolio managers Paul Kim, David Berns and Michael Green actively manage each fund's option overlay strategy. Expense ratios for all these funds are set at 28 basis points, meaning that for every $1,000 invested shareholders would expect $2.80 per year in fees. SPUC Based on portfolio holdings for SPUC, the Upside product seems to employ a ladder strategy using both ETF and underlying index options spread out over various time periods. For example, current holdings for SPUC include SPDR S&P 500 ETF and S&P 500 Index (SPX) call options dated out to June 2023. While funds are permitted by prospectus to have up to 20% exposure to options, these funds generally have exposures of 5% or less. As equity markets have been running, in 2021 we saw SPY return 27.04% and SPUC picking up just shy of four percentage points over SPY to return 30.95% for the year. SPD Based on current portfolio holdings for SPD, the portfolio managers are taking their ability to actively manage the option overlay to heart as it looks like they are not only employing a similar systematic ladder approach to their hedging but also are employing more tactical strategies with vertical spread expiring this month (January) and what appears to be a September 2022 vertical spread as well. As ladder strategies and net long multi-legged trades involve purchasing options, the cost of these trades provided some drag on 2021 returns and we saw SPD underperform SPY by about 3.6% in 2021. As you know, insurance costs money and while the strategy underperformed in 2021, not liking that result is akin to being angry that your home or life insurance policy didn't pay out last year despite the premiums you paid for coverage. SPYC This strategy seeks to provide an overall exposure to the markets that is hedged against extreme moves or what are commonly referred to as Tail Events. This differs from SPD in that SPD looks to generate outperformance from those types of moves while SPYC provides a more basic hedge. It is no surprise then that this fund did a good job matching SPY in 2021 and ended up outperforming by 0.80% over the period. New funds and the rest of the lineup The three funds add to the Downside Convexity product suite and focus on Small Cap (iShares S&P Small Cap 600 Index Fund ), Emerging Markets (iShares Core MSCI Emerging Markets ETF ) and Developed Markets ex-US (iShares TR Core MSCI EAFE ETF ). Looking at the rest of this issuer's lineup there are option overlay products covering the Invesco QQQ Trust , some interest rate and volatility hedge products as well as a growing number of thematic products covering Cloud & Cybersecurity, Fintech and Pop Culture, and while not yet launched it recently filed for a coming Web3.0 focused fund. While it traditionally has been difficult for average investors to take advantage of or even adequately hedge against adverse events, new issuers such as Simplify and others I've written about such as Amplify and Innovator are paving the way for the kinds of opportunities that not too long ago were limited to high and ultra-high net worth clients and institutions. Some of these approaches may take some getting used to and you may have to go back to school in some cases to truly understand how these products function, but your portfolio will be better off for putting in the work to learn.

Let's Simplify These 3 Fund Offerings From Simplify ETFs

Simplify Asset Management's "Downside Convexity" funds look to enhance returns in down markets.

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