On Tuesday, Twin Oak ETF Company launched the Twin Oak Short Horizon Absolute Return ETF (TOAK ). TOAK seeks to offer investors capital appreciation, with the added benefit of low price volatility. The fund is actively managed and operates with a net expense ratio of 0.25%.
To accomplish its investment objectives, the ETF invests in a mix of long calls, long puts, and debit spread options. The specific portfolio allocations for each strategy are based on current market and economic conditions, along with the current holdings for the fund itself.
Mixture of Options
To make these strategies work, TOAK will buy and sell a mix of option contracts that include exchange-listed options, over-the-counter options, and FLEX options. As part of the redemption process, the fund may also directly invest in the underlying assets for the options.
Regardless of specific portfolio allocations, the fund intends to always pair long calls with long puts. Likewise, long vertical debit call spreads will be paired with long vertical debit put spreads.
The fund prospectus notes that TOAK’s pairing strategy could offer a multitude of benefits. TOAK can achieve capital appreciation regardless of whether the underlying asset sees strong performance or a decline, due to investing in both call and put options. This paired game plan also promotes low price volatility for investors.
When choosing potential additions for the portfolio, TOAK keeps price, liquidity, duration, and risk in consideration. The prospectus added that the fund intends to only use European-style options.
Looking at the portfolio horizon, TOAK aims to invest in options with a duration of one year or less. In typical circumstances, the fund will hold an option until its expiration date.
As an additional means for liquidity and putting uninvested cash to work, TOAK may also hold cash and cash equivalents. As an actively managed fund, TOAK can engage in frequent trades. Frequent trading can provide new means to achieve capital appreciation, but could cause increased transaction costs.
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