Simplify ETFs Tweeted a link to their year end summary of how their funds performed in 2022. We've looked at some of their funds over the last year or so, awhile back I test drove one in my account for possible client use, and each time I circle back, I am left with the same conclusion, they don't seem to work the way I as a prospective user would want them to. At this point I am not a buyer of their funds but did want to focus on two funds for this post.
The Simplify US Equity Plus Downside Convexity (SPD) is long the S&P 500 with a protective, long (net long) exposure to puts to protect against downside movement, puts go up in value when prices of the underlying go down. The Simplify US Equity Plus Convexity (SPYC) is long the S&P 500 with an overlay of net long calls and puts to give extra return on the way up from the calls and downside protection from the puts.
Ok, so lots of potential protection just in time for a bear market. How'd they do?
Not good. Both simplify funds lagged market cap weighting (MCW) by 7 percentage points! Holders paid for some presumed measure of protection and got none. To their credit, the funds aren't that expensive, they each charge 28 basis points which could be worth it if they funds ever do what I think investors would hope for.
To the extent the equity plus put options part of these funds really is equity plus tail hedge, as we discussed the other day, tail hedge strategies might be more suited for crashes as opposed to events that look like normal bear markets which is how I'd describe the current market event.
Do SPD and SPYC count as multi-strategy or multi-asset funds? Depends who you ask but until these funds prove otherwise, they are examples of why I typically prefer blending together narrow exposures versus having a fund provider do it for me. Typically, even if not in every instance.
I think these funds, similar to risk parity which is a cocktail of several assets, just don't work the way investors would hope for when they most need them to work.
I've written many times about client and personal holding Standpoint Multi-Asset which blends long equity exposure and managed futures in an attempt to deliver a smoother return than equities but that generally keeps up with equities over the longer term. It too is fairly new but in its first three years it has done what it purported to do. It is not always the best, no fund can be but it generally behaves as advertised.
A few weeks ago I made a passing reference to the Overlay Shares Large Cap Equity ETF (OVL). This fund is long the S&P 500 and sells out of the money put spreads but not that far out of the money. Looking at the fund page, no mention of defense, that's not what it does. It's trying to outperform. Since it's inception, OVL has outperformed on the way up in 2020 and 2021 and lagged on the way down in 2022 by a little over 4.5 percentage points. That's what I'd generally expect from a fund trying to outperform MCW.
Are any of these, not BLNDX, factor funds as we've been writing about for the last few posts? Draw your own conclusion but I think they are. SPD is equity exposure plus protection, the protection can be a factor, the fund can clearly be a substitute for simple MCW or in the context I've been talking about blending together two or three factor funds, including one with some sort of option strategy could be part of the solution these posts are looking for; better risk adjusted returns with maybe a little more yield than MCW.
While they could be part of a solution, I happen to think SPD and SPYC will not end up fitting the bill, but maybe someone else will come along with some sort of different approach that could work. OVL is not the clear and obvious no that I think SPYC and SPD are but I am undecided on that one.
Other than BLNDX, I have no interest or intention of using any of the funds mentioned personally or for clients.
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