RIA Channel: Using Options-Based ETFs To Enhance Allocations

by | Jul 15, 2024 | Appearances, Market Notes, Media Notes

Recently, JD sat down with Keith Black, Managing Director of the RIA Channel, to discuss using options to transform asset allocation.

Aptus has two sides to its business, one managing options-based ETFs and the other helping advisors manage and grow their practices.

 

Both sides are designed to improve asset allocation, the key to investment success driving over 90% of portfolio returns. Introducing options into a portfolio can both reduce downside risk, and facilitate more upside capture through a higher allocation to equities.

 

Monetary and fiscal policy has created persistent inflation, which raises required return targets as budget deficits eat into purchasing power. While investors may be tempted by 5% returns on Treasury bills, the ability to compound at high real rates can only happen with the help of risk assets.

 

In the 1980-2020 period, investments in US fixed-income markets have provided positive returns at a low correlation to equity markets. Since then, we’ve seen that this combination is no guarantee. Fixed income can be viewed as a diversifier, but its status as a portfolio protector comes and goes.

 

Aptus views risk differently, rating the long-term loss of purchasing power as an even greater risk than periodic corrections. Investors should have goals to maximize the long-term compounded returns of their portfolio rather than focusing on short-term drawdowns.

 

Portfolios implementing options-based strategies can put themselves in position to both protect against shock events(left tail), and participate in market upside(right tail). Our focus is on helping advisors help clients embrace what we think is a more reliable path to successful outcomes. 

This podcast was recorded on July 8, 2024.The opinions expressed are solely those of the podcast participants and do not reflect the opinion of Aptus Capital Advisors. The opinions referenced are as of the date of recording and are subject to change without notice. This material is for informational use only and should not be considered investment advice. The information discussed herein is not a recommendation to buy or sell a particular security or to invest in any particular sector. Forward-looking statements are not guaranteed. Aptus reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs and there is no guarantee that their assessment of investments will be accurate.

Investing involves risk. Principal loss is possible. The Fund are non-diversified, meaning they may concentrate its assets in fewer individual holdings than diversified funds. Therefore, the Funds are more exposed to individual stock or ETF volatility than diversified funds.

Investing in ETFs are subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of the shares may trade at a discount to its net asset value (“NAV”), an active secondary trading market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact a Funds ability to sell its shares. Shares of any ETF are bought and sold at Market Price (not NAV) and are not individually redeemed from the fund. Brokerage commissions will reduce returns. Market returns are based upon the midpoint of the bid/ask spread at 4:00pm Eastern Time (when NAV is normally determined for most ETFs), and do not represent the returns you would receive if you traded shares at other times.

The Funds may invest in options, the Funds risk losing all or part of the cash paid (premium) for purchasing put and call options. The Funds’ use of call and put options can lead to losses because of adverse movements in the price or value of the underlying security, which may be magnified by certain features of the options. The Funds’ use of options may reduce the ability to profit from increases in the value of the underlying securities.

Derivatives, such as the options in which the Funds invest, can be volatile and involve various types and degrees of risks. Derivatives may entail investment exposures that are greater than their cost would suggest, meaning that a small investment in a derivative could have a substantial impact on the performance of the Funds. The Funds could experience a loss if its derivatives do not perform as anticipated, the derivatives are not correlated with the performance of their underlying security, or if the Funds are unable to purchase or liquidate a position because of an illiquid secondary market.

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