A Modern ETF Approach to Diversifying a Traditional Portfolio Mix

Exchange traded fund investors can look to asset allocation ideas and three new products that solve the real-world challenge of staying invested no matter what happens in the market.

In the recent webcast, Elections, The Fed, Geopolitics, OH MY! Building a Modern All-Weather Portfolio, Paul Kim, CEO and Co-Founder, Simplify, explained that the presidential election will have real life consequences that investors have to consider, such as Joe Biden's tax plans, Donald Trump's "middle class' tax cuts, the size and scope of another fiscal stimulus, Federal Reserve appointments, environmental policy, technology anti-trust issues, Covid-19 response, and foreign policy, among others.

Kim also highlighted the ongoing supportive monetary policies that could further fuel growth and market gains. The Federal Reserve has refocused on inflation and it will do whatever it takes to push inflation over 2% and push unemployment from its current level of 8% to 3% or less. Both are likely to take years. Consequently, bonds could enter a long-term bear market while equity valuations, which appear extended to many, could go even higher.

So far, the markets are in a sweet spot, given current inflation levels. Kim point out that market valuations are typically at their highest level when inflation falls between 1% to 2%. If inflation were to rise or fall from this level, market valuations typically fall as well.

An Investor's New Normal

As investors readjust to this new normal, David Berns, CIO and Co-Founder, Simplify, underscored the need to find a balance between the various assets to generate the same level of returns many have become accustomed through a traditional stock and bond portfolio. Investors may even consider alternative strategies outside of these traditional stock and bond picks to better manage risk and still maintain upside potential.

Specifically, Berns explained that investors can incorporate puts overlaid on equities for a protective positioning or calls overlaid on equities to enhance the performance.

Put options may be an alternative avenue for investors to mitigate risk while maintaining their long exposure to the stock markets. Simplify’s downside protection strategy includes a 98% beta exposure to the S&P 500 Index and a 2% put option overlay that includes modest and present annual option budget, focus on two common types of market dislocations, and sensitivity of options payoffs. The strategy comes with quarterly dividends through a tax-efficient and cost-effective ETF wrapper.

There is also an increasing probability of greater equity moves higher since inflation is a boon for nominal earnings and multiples have room to run with yield curve control from the Federal Reserve. To capitalize on further upside potential, Simplify has deployed deep out of the money calls. Specifically, Simplify’s upside strategy includes a 98% beta exposure to the S&P 500 and 2% call option overlay with modest and preset annual option budget, deep OTM strikes, focus on one type of market dislocation and robust to path dependency inherit in options.

Simplify has recently come out with a suite of so-called PLUS Convexity ETFs, including the Simplify US Equity PLUS Convexity ETF (SPYC), Simplify US Equity PLUS Downside Convexity ETF (SPD), and Simplify US Equity PLUS Upside Convexity ETF (SPUC).

The Simplify US Equity PLUS Convexity ETF is intended to boost equity performance during extreme market conditions, providing exposure to the S&P 500 with a Call/Put Overlay.

The Simplify US Equity PLUS Downside Convexity ETF is designed to boost equity performance during extreme drawdowns, providing exposure to the S&P 500 with a Put Overlay.

Lastly, the Simplify US Equity PLUS Upside Convexity ETF is intended to boost equity performance during extreme market rallies, providing exposure to the S&P 500 with a Call Overlay.

Investors can diversify their protective and performance assets through Simplify's equity plus downside convexity strategy. They can also avoid the lower performance drag of bonds without reaching too far up the risk curve through the equity plus downside convexity exposure.

Financial advisors who are interested in learning more about investment strategies for today’s markets can watch the webcast here on demand.

Read more on ETFtrends.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.