Tuesday, November 26, 2024

Hedged Equity ETFs? We're Just Getting Started

Quick hits galore today.

Tema ETFs is throwing in on ETFs that try to find a middle ground between exchange traded products (ETP) and annuities similar to LifeX from Stone Ridge. For anyone new, I am not a fan of annuities as we know them now, not even a little bit, but the idea of annuitizing an income stream from an ETP based on a longevity pool is worth exploring and a space that will evolve. Maybe what Tema has filed for will be the solution or maybe just a step closer to the solution. 

Per the prospectus, they will be more multi-asset in nature than the LifeX suite. The prospectus also uses the term glide path which is more commonly associated with target date funds. I've never been a fan of target date funds either but would want to learn more about annuitizing the income from the Tema suite if that's what's going on. Doing a control f search of the prospectus, I didn't find the term longevity pool so maybe they're just half annuitized. This remains a space worth keeping tabs on. Some fund provider will eventually figure this out if LifeX or Tema haven't.

Tema has some interesting funds in the hopper coming soon too.

Krane Shares partnered with Hedgeye Asset Management to list yet another hedged S&P 500 ETF with symbol KSPY. The fund will buy put spreads below the market and sell calls above the market. For now, the put spreads are only 100 points wide so it's not clear that they would protect much against a serious whoosh down but the fund might be able to spread off differently when they feel it warranted. 

Another hedged equity ETF that I missed from a year ago is the JP Morgan Hedged Equity Laddered Overlay ETF (HELO). It also buys put spreads below the market but wider than with KSPY's initial positioning, and sells calls. The differentiation is that it staggers the expirations of the options by just a little which they believe will allow for more upcapture of the market cap weighted S&P 500 than other option strategy funds.

I saw a reference to HELO being identical to Simplify Hedged Equity (HEQT). That seems about right and in HELO's lifetime both it and HEQT have had better upcapture than JEPI.



Valuation as a tool for timing anything has a lousy track record.


I write frequently about needing to move the 40, or whatever percentage away from bonds with duration. That call has been correct for a while and we'll see if it stays correct or not but it is based on an attempt to understand what is happening in the present and then trying to understand greater risks going forward. The greater risk going forward to bonds with duration is that they continue to be unreliable sources of volatility, less able to effectively diversify portfolios. 

Not quite a year ago, we mentioned the Cyber Hornet S&P 500 Bitcoin 75/25 Strategy ETF (ZZZ). As the name implies it allocates 75% to the S&P 500 and 25% to Bitcoin. In that old post, I posited that anyone would probably be better off building it themselves, 75% to an S&P 500 ETF, 25% to a Bitcoin fund. 


Building it yourself is a simpler expression of the idea. It blends together, in this case, two simple fund that each have fewer moving parts than the multi-asset version. Obviously there are no absolutes on this point, client and personal holding BLNDX as one example, but always explore the simpler path when there is one. 

Finally, here's a link to a CNBC interview with Michael Saylor about how he is exploiting Microstrategy's balance sheet to buy more Bitcoin. The simple version the company is issuing convertible bonds with a zero percent coupon and taking the proceeds to buy more Bitcoin. The stock keeps going up so the bonds convert to common. It works, as long as Bitcoin goes up at a faster rate than they are diluting their common stock. Look out below if Bitcoin ever goes down by 80% again.

The interview itself was wild. Saylor always talks very fast and he hit the interviewer, Andrew Ross Sorkin, with an avalanche of jargon, on purpose I suspect, that no journalist could reasonably be expected to understand. I didn't understand it, I don't know if it was real or complete nonsense. I'm sure what they are doing is legal but I don't know how it's legal.

A small company called Semler Scientific (SMLR) is trying to take a page from Microstrategy's playbook if you are curious and want to learn more.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

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