Investors were 'lulled to sleep for 10 years', says CEO

Generation 2.0 of uncapped buffered ETFs can compensate for low-yield environment, says firm

Investors were 'lulled to sleep for 10 years', says CEO

Structured outcome ETFs have become increasingly popular as volatility becomes the norm in 2020. Geopolitical instability and the upcoming U.S. election has compounded the economic effects of the pandemic since the March crash.

TrueMark Investments, based in Rosemont, IL., told WP why it’s leading the second generation of these buffered ETFs by offering the first of its kind to feature built-in downside buffers with uncapped upside participation.

Sub-advised by SpiderRock Advisors, a Chicago-based asset management firm specializing in option overlay strategies, the fund (SEPZ, expense ratio 0.79%) allows for the “potential of an asymmetric return profile”, which seeks to provide investors with returns (before fees and expenses) that track the S&P 500 Price Index while seeking to provide a buffer of 8-12% on that index’s losses over the fund’s one-year investment period.

In practice, the fund adviser will target the buffer at 10% of index declines over the investment period following the first day of trading, while also allowing for uncapped upside participation. SEPZ is the third of 12 monthly series ETFs in the suite. Each fund will roll over at the end of a year-long term, at which point the downside buffer and upside participation will reset based on current pricing for the options used by the strategy for each respective ETF.

Michael Loukas, CEO of TrueMark Investments, said that, in simple terms, the series replicates the volatility management of a traditional structured note but within an ETF, with all the benefits that entails - traditional liquidity, no credit risk and tax efficient.

“What we do a little bit differently than most is we have a downside buffer but instead of doing a one-for-one upside capture to a cap, we do a percentage upside capture with an unlimited ceiling.

“We believe that equities are inherently positive over the long term. We also believe that some downside mitigation will not only help keep investors emotionally connected to equities without having to run for the hills, but that this ETF also allows them to maintain a high level of exposure to equities in low-rate environments when their normal 60-40 or 80-20 asset allocation portfolios are looking for ways to compensate for the yield portion that’s not doing anything.”

Typically, in volatile times – and March and April are prime examples – the market whipsaws, with significant drawdowns that often snap back hard.

Loukas argued that it’s important not to cap right tail upside volatility, which can do serious damage to an investor’s portfolio. It’s a stance that also fits his firm’s bullish long-term view on U.S. equities. He said: “We are, at this stage, the only uncapped product in the space and we consider that a logical evolution of this approach in the ETF format.”

He also thinks the strategy is ideal for a world and market in a state of flux, something Loukas expects to remain for a long while yet.

“We were lulled to sleep for about 10 years,” he said. “We started to believe low-rate environments were just going to be a thing. But volatility is back, it’s given us a rude awakening, and it's going to be here for a while. It's important for investors and advisors alike to account for that.”

The buffered strategy is suited to both the set-it-and-forget-it investor and the more tactical one. Loukas believes that as advisors get more educated on the mechanics of the approach and how to use it and trade it tactically, they’ll be able to ladder out different outcomes for their investors, particularly since an ETF is launched every month.

For an advisor, he believes there are two main challenges that this product meets head-on.

“We know that investors, if they fall back in their emotions, can make the wrong decision,” he said. “So, taking some of that out of equation is very beneficial. It’s also compensating for that low-yield, low-rate environment and allowing investors that still need growth to maintain their exposure to a volatile equity market while changing the volatility profile. We think that's hugely beneficial right now.”