A new ETF is preparing to attract hesitant investors
Risk-averse investors have a new option for making safer bets on Tesla.
Innovator ETFs launched the Innovator Hedged TSLA Strategy ETF (TSLH) – among other defined outcome products – last month.
According to ETF CEO Bruce Bond, it gives investors exposure to the stock while largely avoiding volatility and valuation risk by design. It is a buffered ETF using a risk inversion strategy to minimize downside while capping gains.
“You buy TSLH, hedge Tesla, you basically get 10% upside and you have a 10% floor,” Bond explained on CNBC’s “ETF Edge” last week. “Now what’s a floor – it’s a maximum loss of 10%. If Tesla goes down 20%, you lose 10%. If it goes down 50%, you lose 10%.”
Treasuries make up about 90% of the hedged fund “to build a potential floor against significant losses on a quarterly basis,” Innovator ETFs reported in the ETF’s launch press release. “A call option spread on TSLA using FLEX options” makes up the rest of the fund’s portfolio.
“The projected upside cap for the remainder of the current calendar quarter (through September) is 8.70%,” the company also said.
Its floor resets every calendar quarter but will never exceed 10%, Bond told CNBC, noting that the ETF’s floor rested at 9.23% when it launched.
The Innovator Hedged TSLA Strategy ETF is up 5% since its launch on July 26. Meanwhile, Tesla shares are up 12% over the same period.
This isn’t the first time Bond’s company has launched an ETF using this risk inversion strategy.
Innovator ETFs launched the Innovator Defined Wealth Shield (BALT) ETF last year which focuses on the S&P 500 Index.
But the strategy is criticized by the United States Securities and Exchange Commission.
SEC Chairman Gary Gensler issued a statement shortly after addressing the risks that can arise from “complex” exchange-traded products such as leveraged or inverse ETFs, highlighting potential issues with their nature. short term.
“These ETPs, however, can present risk even to sophisticated investors, and can potentially create system-wide risk by operating in unexpected ways when markets experience volatility or stressed conditions,” Gensler said. in its October 2021 statement,
Gensler proposed “potential regulation” to help protect individual investors. However, Bond defended the products of Innovator ETFs, suggesting that the buffers offer significant risk-control value.
The SEC declined to provide a statement.
“Just because it’s new doesn’t mean it’s complex”
“I think FINRA [Financial Industry Regulatory Authority] is starting to realize that, and the SEC is starting to realize that,” he said. “Just because it’s new doesn’t mean it’s complex.”
Bond thinks the defined wealth protection ETF could be attractive to investors looking to stay away from bonds. He implements an options strategy, selling calls at the top and placing sell spreads at the bottom.
“They know the rates are going up,” he said. “They’re pretty sure they’re going to lose money. They’d rather tie their low-risk money to the stock market with a 20% buffer against losses.”
The rise in the past year has been rare due to market volatility, Bond added.
The ETF is up 0.7% since its launch on July 1, 2021.