VettaFi’s Fixed Income Symposium finished on Monday with a conversation about alternative income, or alts. Alts in ETFs notably gathered attention in 2022 when both bonds and stocks were down. In an environment where so many firms want to get clients’ cash off of the sidelines, strategies at firms like Simplify and Innovator might play a role. VettaFi vice chairman Tom Lydon hosted a conversation with Simplify CEO and cofounder Paul Kim and Innovator SVP and CIO Graham Day to discuss.
Why now for alts in ETFs? For those investors who have been sitting in cash and reaping potent yields, but may still want to get back in, alts offer downside protection. Day, for example, cited JPMorgan’s comments on its clients to highlight the need for funds that get money off the sidelines.
“One thing that we had all talked about was right now, JPMorgan itself is saying that their clients are 25 to 30% invested in cash,” Day said. “They need tools to get their clients off the sidelines. I think what Paul (at Simplify) and we are doing here at Innovator is offering those tools to advisors in a better wrapper.”
Alts in ETFs and the 60/40
Day added that alts ETFs are calling the 60/40 model into question, especially when 2022 showed that stocks and bonds are not always inversely correlated. That, Day said, means that investors may need to look outside of traditional core bonds for true diversification. For Kim, the conversation even includes looking at whether the 60/40 should become a 50/30/20 split portfolio.
“I think we’re finally at that sort of stage where ETFs are going to democratize access to alternatives through the highest level of financial products out there, and hopefully in a better and a more transparent vehicle,” Kim said.
Alts in ETFs allow investors to access payoffs that had been available in a bank, insurance, or even a hedge fund wrapper and put them into an ETF, Day said. Each firm has its own approach. At Innovator, for example, investors can find the Innovator Equity Defined Protection ETF – 2 Yr to July 2025 (TJUL ) strategy. TJUL, Day said, is the “first ETF” that has 100% buffer to the S&P 500 on the downside over a two-year time frame.
“We’re looking at the insurance wrapper and seeing that, look, there’s $20, $30 billion being traded in these principally protected insurance wrappers each quarter,” Day said. “Well, now we have an ETF alternative.”
Defined Outcome Fixed Income ETFs and Other Approaches
Innovator also offers a series of ETFs called Premium Income Barrier ETFs, putting fixed income in a defined outcome framework. They add, Day said, a 20% downside protection against losses with a set level of income.
Simplify, meanwhile, focuses on T-bills and a “tiny” options basket in its most vanilla fund, looking to build “an intentionally boring, stable NAV type of product,” Kim said.
The firm does have, for example, the Simplify Enhanced Income ETF (HIGH ), which offers high yield-like yields “in the nines” with no credit risk and very low duration risk by buying T-bills and selling an options basket, he added. It also offers alts strategies like managed futures or equity long strategies that had previously been mostly quant hedge fund strategies.
The replay of the Fixed Income Symposium is now live; registration to view on-demand is available at the link.
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