Simplify ETFs have quickly built up a reputation for offering investors some of the most fascinating alternative ETF puzzle pieces.
The fund we’ll be examining today certainly fits the bill.
Better known as Simplify Volatility Premium ETF.
We’re fortunate enough to have Simplify’s very own Shailesh Gupta (Head of Trading and the product designer of SVOL) join us as part of the “Strategy Behind The Fund” series to help unpack this unique ETF from various vantage points.
Without further ado, let’s turn things over to Shailesh!
Reviewing The Strategy Behind SVOL ETF (Simplify Volatility Premium ETF) with Shailesh Gupta
Hey guys! Here is the part where I mention I’m a travel and food vlogger and blogger! This “The Strategy Behind The Fund” interview is entirely for entertainment purposes only. There could be considerable errors in the data I gathered. This is not financial advice. Do your own due diligence and research. Consult with a financial advisor.
These asset allocation ideas and model portfolios presented herein are purely for entertainment purposes only. This is NOT investment advice. These models are hypothetical and are intended to provide general information about potential ways to organize a portfolio based on theoretical scenarios and assumptions. They do not take into account the investment objectives, financial situation/goals, risk tolerance and/or specific needs of any particular individual.
What’s The Strategy Of SVOL ETF?
For those who aren’t necessarily familiar with an “optimized exposure for monetizing the premium in the VIX futures market” alternative style of asset allocation, let’s first define what it is and then explain this strategy in practice by giving some clear examples.
VIX is an index – not an asset that one can buy.
Investors take on VIX exposure through futures to hedge equity beta.
Long VIX exposure, which one can think of as buying insurance against market volatility, loses money over long time horizons.
Hence, short VIX exposure should make money as the equity risk premium is getting transferred into the VIX market.
Monetizing this risk premium in a risk managed way is what we do in SVOL.
We short ~25% VIX futures and buy OTM call options on VIX to hedge the tail risk of a sharp VIX spike.
In normal markets short futures harvest significant premium, while in markets with extreme volatility, like the COVID crash of 2020, deep, OTM VIX options come into play.
source: Simplify Asset Management on YouTube
Unique Features Of Simplify Volatility Premium SVOL ETF
Let’s go over all the unique features your fund offers so investors can better understand it.
What key exposure does it offer?
Is it static or dynamic in nature?
Is it active or passive?
Is it leveraged or not?
Is it a rules-based strategy or does it involve some discretionary inputs?
How about its fee structure?
The portfolio is mostly static with VIX futures exposure around 25%.
We avoid daily rebalancing and let the exposure drift a bit with market moves to mitigate the drag typically associated with funds with short exposure.
It is an active ETF but the philosophy is to run a passive portfolio that can monetize the volatility risk premium in a risk mitigated way.
It is an under levered, mostly rules-based strategy which is designed to have a lower beta and volatility than US large cap equities and deliver equity income across different market conditions.
The discretion is marginal for the sake of risk mitigation and efficient roll/rebalancing of futures and options.
What Sets SVOL ETF Apart From Other Alternative Funds?
How does your fund set itself apart from other “alternative funds” being offered in what is already a crowded marketplace?
What makes it unique?
SVOL is unique in that it taps into an underutilized part of the risk landscape while also embedding tail risk hedging.
It is not only an alternate to traditional and crowded equity income strategies but can also be treated as an alternate beta to equities.
It also acts as a diversifier in a broader basket of alternate investments and potentially a primary return generator.
source: Simplify Asset Management on YouTube
What Else Was Considered For SVOL ETF?
What’s something that you carefully considered adding to your fund that ultimately didn’t make it past the chopping board?
What made you decide not to include it?
We considered a strategy with dynamic exposure up to 50% but decided against it to maintain a risk-managed profile while mitigating sequence of return risks that can emerge when using high leverage in short VIX.
When Will SVOL ETF Perform At Its Best/Worst?
Let’s explore when your fund/strategy has performed at its best and worst historically or theoretically in backtests.
What types of market conditions or other scenarios are most favourable for this particular strategy?
On the other hand, when can investors expect this strategy to potentially struggle?
The strategy performs best when markets are sideways or trending upwards and worst when there are a series of risk events that result in above average VIX readings and higher volatility (vol of vol) related to VIX.
The strategy is designed to be robust for markets with extreme volatility like in March 2020, as that is when out of the money VIX options come into play.
source: Passive Income Investing on YouTube
Why Should Investors Consider Simplify Volatility Premium SVOL ETF?
If we’re assuming that an industry standard portfolio for most investors is one aligned towards low cost beta exposure to global equities and bonds, why should investors consider your fund/strategy?
I would argue that short VIX is a beta exposure like US large cap equities and in fact Morningstar categories SVOL as such.
It happens to be a part of the market where demand to be long VIX exposure is much greater than short VIX exposure, which results in an elevated risk premium.
When harvested in a risk managed way, this exposure can result in a portfolio with lower than market risk and the potential for higher than market return.
How Does SVOL ETF Fit Into A Portfolio At Large?
Let’s examine how your fund/strategy integrates into a portfolio at large.
Is it meant to be a total portfolio solution, core holding or satellite diversifier?
What are some best case usage scenarios ranging from high to low conviction allocations?
It depends on the needs of an individual investor.
SVOL can act as a diversifier and return generator for a typical alternative portfolio or it can be a core holding for an equity income investor.
It is probably not a total portfolio solution unless one has a specific view of the market, yet it does (in my opinion) offer one of the best reward per unit of risk in current market conditions.
The Cons of SVOL ETF
What’s the biggest point of constructive criticism you’ve received about your fund since it has launched?
The biggest criticism, and rightly so, is that it is a complicated strategy tapping in a market which is not very well understood.
It is complicated and difficult to access for most investors, which is why it has extra return per unit of risk.
Our job at Simplify is to offer simple investible solutions like driving a car where complicated stuff stays under the hood.
The Pros of SVOL ETF
On the other hand, what have others praised about your fund?
Lower than market beta and higher than market returns in SVOL since inception are well appreciated, which means that we have calibrated the risks well.
Income investors also like high and consistent dividends.
Getting a “fixed” income from an equity-like exposure is something that investors seem to value, as well.
Is Short VIX A Momentum Or Value Strategy?
We’ll finish things off with an open-ended question.
Is there anything that we haven’t covered yet that you’d like to mention about your fund/strategy?
I sometimes wonder is short VIX should be momentum strategy or a value strategy.
Presently, it seems to be both.
From a momentum point of view, it has been doing well and thus will likely continue to do well.
On the other hand, curve roll premium per unit of beta risk is also quite and hence it is also a value strategy.
Short VIX should be integral part of any diversified income solution.
SVOL is providing it in a generic way, and we are working on integrating this exposure in other income solutions.
Connect With Simplify ETFs and Shailesh!
Simplify Asset Management: Simplify ETFs
Fund Page: SVOL ETF
Twitter: @SimplifyAsstMgt / @VIX_Sage (Shailesh)
YouTube: Simplify Asset Management
source: Simplify Asset Management on YouTube
Nomadic Samuel Final Thoughts
I want to personally thank Shailesh for taking the time to participate in the “Strategy Behind The Fund” series by contributing thoughtful answers to all of the questions!
Also, special thanks to Eric McArdle (@EMcArdleInvest) for helping to coordinate things behind the scenes!
Simplify offers some of the most innovative alternative funds in the marketplace and it’s fantastic that we’ve now covered two other ETFs as part of the “Strategy Behind The Fund” series:
I’ve also personally reviewed some of my favourite Simplify funds:
- FIG Simplify Macro Strategy ETF
- TYA Simplify Intermediate Term Treasury Futures Strategy ETF
- CTA Simplify Managed Futures Strategy ETF
- SPD Simplify US Equity PLUS Downside Convexity ETF
If you’ve read this article and would like to have your fund featured, feel free to reach out to nomadicsamuel at gmail dot com.
That’s all I’ve got!
Ciao for now!
Important Information
Investment Disclaimer: The content provided here is for informational purposes only and does not constitute financial, investment, tax or professional advice. Investments carry risks and are not guaranteed; errors in data may occur. Past performance, including backtest results, does not guarantee future outcomes. Please note that indexes are benchmarks and not directly investable. All examples are purely hypothetical. Do your own due diligence. You should conduct your own research and consult a professional advisor before making investment decisions.
“Picture Perfect Portfolios” does not endorse or guarantee the accuracy of the information in this post and is not responsible for any financial losses or damages incurred from relying on this information. Investing involves the risk of loss and is not suitable for all investors. When it comes to capital efficiency, using leverage (or leveraged products) in investing amplifies both potential gains and losses, making it possible to lose more than your initial investment. It involves higher risk and costs, including possible margin calls and interest expenses, which can adversely affect your financial condition. The views and opinions expressed in this post are solely those of the author and do not necessarily reflect the official policy or position of anyone else. You can read my complete disclaimer here.
