New York-based Simplify Asset Management has introduced two new ETFs providing exposure to the Nasdaq 100 Index while using actively managed option-strategy overlays in a bid to enhance portfolio returns.
Simplify launches options-enhanced Nasdaq 100 ETFs
The Simplify Growth Equity PLUS Convexity ETF (QQC US) and Simplify Growth Equity PLUS Downside Convexity ETF (QQD US) have listed on Nasdaq and each been seeded with $2.5 million AUM.
The ETFs invest 80% of their assets in the Invesco QQQ Trust (QQQ US), Invesco’s $140 billion Nasdaq 100 tracker.
The Nasdaq 100 tracks the performance of 100 of the largest non-financial companies by market capitalization listed on Nasdaq, subject to various diversification requirements.
The remaining 20% of each ETF’s assets is allocated to an actively managed options component which is designed to create a convex payoff profile for the ETF. Convexity is a mathematical term which, in this case, indicates that the relationship between the performance of the ETF and the Nasdaq 100 is not linear.
The options overlay of the Simplify Growth Equity PLUS Convexity ETF aims to create a convex payoff on both the upside and the downside. The strategy consists of purchasing a series of out-of-the-money put options in order to increasingly protect capital as market drawdowns deepen, as well as purchasing a series of out-of-the-money call options in order to accelerate performance as the market rally strengthens. The ETF is likely to outperform in strong bullish or bearish conditions but may underperform when the Nasdaq 100 is range-bound and the options contracts expire out-of-the-money, with their cost weighing on the fund performance.
The options overlay of the Simplify Growth Equity PLUS Downside Convexity ETF, meanwhile, aims to create a convex payoff on the downside only by purchasing a series of out-of-the-money put options. The ETF is likely to outperform in bearish conditions but may lag the market during bullish or range-bound conditions.
According to the prospectus, the ETFs will purchase options as needed depending upon rebalancing requirements, the individual option expiration dates, and the current level of market volatility.
Each ETF comes with a net expense ratio of 0.45% due to a contractual fee waiver in place until at least December 2021. The funds’ gross expense ratios are 0.70%.
Simplify has also filed registration papers with the SEC to launch the Simplify Growth Equity PLUS Upside Convexity ETF (QQU US). This fund would also invest 80% of its assets in the Invesco QQQ while utilizing call options to create a convex payoff on the upside only.
Simplify debuted its first ETFs in September with the launch of three funds providing similar options-enhanced exposure to the S&P 500. These ETFs collectively house $90m in assets with the largest being the $60m Simplify US Equity PLUS Convexity ETF (SPYC US). It uses options to create a convex payoff on both the upside and the downside.