This year’s complex market and economic backdrop create a number of challenges for advisors and investors. Investors looking to diversify their equity portfolio should consider the Parametric Equity Plus ETF (PEPS). Launched last November, the fund combines equity and options strategies within a singular fund that outperforms the S&P 500 Index since PEPS’ launch, while adding diversification.
PEPS is actively managed and seeks long-term capital appreciation. It does so by leveraging Parametric’s (the subadvisors of the fund) experience in direct indexing as well as options-based strategies. Launched November 7, 2024, at a little over three months since inception, PEPS currently offers better total returns compared to the benchmark S&P 500 (using the SPDR S&P 500 ETF Trust (SPY ) as a proxy).
Beyond its performance potential, PEPS adds diversification to equity portfolios. It does so through a combined equity and options strategy while actively managing the portfolios for tax efficiency.
On the equity side, the fund invests in companies within the Solactive GBS United States 500 Index, an index of the 500 largest U.S. companies by market cap. When investing, the strategy seeks to reflect the returns of the index as well as key characteristics. These include value, size, volatility, growth, and momentum as well as industry and sector weights.
However, PEPS does not invest in every security, as it seeks to limit overlap between the equity and options portfolio to 70% or less so as to avoid the straddle rule. This rule, when triggered, may increase capital gains by deferring losses realized. By actively managing the options and equity exposures, the managers seek to provide a tax-efficient portfolio for investors.
At the same time, the fund creates an options portfolio with a goal of beta neutral in its exposures. It’s a type of approach to options investing that may provide alpha more consistently than direct stock investing. The options portfolio includes a systematic system that sells (writes) uncovered call options on the underlying Index with an expiration up to two weeks from the date written. To offset the short equity exposure that the written calls generate, the strategy balances via long equity derivatives. These may include futures, options, or FLEX options on the underlying Index or the underlying ETF.
The goal of the systematic options strategy is to enhance total returns with less reliance on the market environment. The fund also buys put options on the underlying Index to hedge against equity drawdowns as part of its risk management strategy. However, the hedge only seeks to limit portfolio losses that may exceed any drawdowns experienced by the underlying Index.
PEPS has management fees of 0.29%, making it an affordable, actively managed entry within equity portfolios.
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