Many ETFs offer investors a solution aimed at addressing markets’ inherent instability. Whether via economic or political events, volatility is a consistent challenge for investors, firms, asset managers, and advisors. With their new ETF, a boutique partnership is looking to flip the script and harness volatility to guide their investments without caps.
WEBS Investments, Inc. and Westwood Holdings Group, Inc., launched the WEBs Defined VolatilitySM ETF duo this week. The WEBs Defined VolatilitySM SPY ETF (DVSP) and the WEBs Defined VolatilitySM QQQ ETF (DVQQ) look to “provide a more stable investment experience across market conditions, using a dynamic, rules-based strategy to adjust exposure…based on real-time volatility,” according to the partnership’s release.
Volatility ETFs Into 2025
How do the funds work, specifically? The pair track the Syntax Defined VolatilitySM U.S. Large Cap 500 Index and the Syntax Defined VolatilitySM Triple Qs Index, respectively. In low-volatility periods, the pair of ETFs use total return swaps to amplify exposure to their underlying ETFs. Those underlying ETFs include the SPDR S&P 500 ETF Trust (SPY ) and the Invesco QQQ Trust Series I, respectively. In high-volatility periods, the ETFs move to cash and U.S. Treasuries to cushion losses.
For WEBs Investments Inc. Chief Executive Officer Ben Fulton, a longtime industry veteran who worked on Invesco’s PowerShares ETF platform from 2005 to 2013, volatility has long loomed as a key source of advisor stress. Taking a closer look resulted, not in diversifying a portfolio to address volatility, given how highly correlated global markets are, but on the volatility itself.
“We took a different approach and said…maybe what we need to do is not focus on selection, stocks but maybe we need to focus truly on the volatility and make that our North Star that we’re looking at, and we control that,” Fulton said. “If we control that, right, we’re going to give a smoother ride, it’s going to make investors stay invested.”
“A lot of times we liken this to weather…and we’re the Nest thermostat, right?” Fulton added. “If it’s cold outside, we’ll put some heat on, we’ll get you back to 70, and sometimes it’s 70 degrees, and it’s perfect weather.”
Looking Ahead
The pair of ETFs, which charge 91 and 96 basis points respectively, contrast to other structured products that offer volatility management like buffered ETFs. Those funds, explained Westwood’s Head of ETF Distribution & National Accounts Chris Doran, offer tradeoffs compared to their new volatility ETFs.
“Buffered ETFs, great innovation, but there’s tradeoffs right?” Doran said. “It’s like a structured product…eventually, they’ll give you some of the downside, but you can get hit. You have to hold it a certain period of time, and you’re going to get capped on an up market.”
In addition, Fulton said, outcome-based funds may sometimes apply to those at or near retirement. For those younger investors needing more growth, however, capping returns may not make sense. Looking at a test case in COVID, amid significant volatility and panic, the strategy’s model emphasized jumping into the market, he added.
In the future, the duo explained, they expect that they may file further volatility ETFs that take the same volatility approach to a different underlying fund. Looking ahead, the pair of funds could be worth watching as potential geopolitical and policy-related volatility looms over markets.
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