What some in the industry would refer to as an "upstart ETF issuer," Simplify ETFs has made a name for itself as a next-generation problem solver. I wrote about some of the exchange-traded fund issuer's funds a while ago and since then, it has expanded its product lineup to include 27 funds with a total of $1.3 billion under management.
The firm recently added to its fund lineup with the launch of the Simplify Commodities Strategy No K-1 ETF (HARD) . The fund is actively managed and tracks trading signals provided by Altis Partners, which also powers the Simplify Managed Futures Strategy ETF (CTA) . Both funds sport a 75-basis point expense ratio so a shareholder with $1,000 invested over a calendar year would pay $7.50 in fees over that period.
K-1 vs. 1099
As we are in the final stages of the 2022 tax season, here's a short primer on the difference between receiving a 1099 statement from a fund issuer and a K-1.
Generally speaking, Commodity Trading Advisors (CTAs) set up their products with the Commodity Futures Trading Commission (CFTC) as partnerships, so investors in these products are not just shareholders, but limited partners. Being a limited partner means that investors not only receive the benefit of any income generated by the partnership, but are also responsible for their pro-rata share of liabilities, including any taxes owed.
Fund issuers establish their products under the auspices of the Securities and Exchange Commission and these products are set up as standalone companies. Because of this, the company is responsible for its own liabilities and then can pay dividends and issue capital gains to shareholders. The 1099 form reflects these payments made to shareholders.
From many taxpayers' perspectives, receiving a 1099 form is preferable because there is no additional potential tax liability and because K-1 forms are generally issued later in the tax season as partnerships have until March 15 to send out these statements.
To be clear, neither HARD nor CTA issue K-1s to shareholders, but my take is that someone in the marketing department spoke up prior to the launch of HARD and lobbied to include the "No- K-1" in the fund's name if only to make it abundantly clear to prospective shareholders.
CTA vs. HARD
CTA lives up to its ticker's promise as a broad commodities product. It has exposure to hard commodities like gold, silver, copper, natural gas, and crude oil, soft commodities like corn, cotton, cattle, soybeans, sugar, and wheat, and financials like Canadian government bonds and Secured Overnight Financing Rate (SOFR) futures. SOFR is the industry's answer to the old London Inter-Bank Offered Rate (LIBOR) after the rate-fixing scandal from a few years ago.
HARD provides a much more targeted portfolio with exposure to gold, natural gas, crude oil, heating oil, corn, soybeans, and wheat. When I first saw the ticker, I thought it would be focused on hard commodities but I'm glad to see the fund isn't limiting its ability to take advantage of markets where it sees opportunity.
While the funds provide different exposures to investors, both funds are long gold and energy, save natural gas, and CTA is also long sugar, SOFR, and Canadian government 10-year bond futures. All other commodities are held short in their respective fund.
Wrap It Up
As mentioned earlier, Simplify continues to carve out a good-sized place for itself in the ETF industry. While other issuers have been busy launching products that look to capture the second-order effects of inflation, last year's launch of CTA and the recent launch of HARD show that Simplify, along with Altis Partners are going to the source to take advantage of opportunities on both the long and short side of the equation.
