Tesla’s volatility spurs creation of first hedged single-stock ETF
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Just weeks after the first US-listed leveraged exchange-traded funds, investors are being offered the opposite in a Tesla-based offering that protects against sharp drops in its price.
The world’s first “risk-managed” single-stock ETF, from Illinois-based Innovator Capital Management, is designed to protect investors from large losses — in exchange for a cap on upside potential.
The Innovator Hedged TSLA Strategy ETF (TSLH) will limit potential losses to 10% per quarter, with the initial contract cap (running through the end of September) set at 9.29%.
“While there is no doubt that Teslas are incredibly stylish and smooth-riding vehicles, the very high volatility in stocks leaves a lot to be desired,” said Bruce Bond, co-founder and chief executive of Innovator.
“Yet the potential for innovation that Elon Musk’s company represents is hard to ignore. For investors with a lower risk tolerance who still want exposure, we are excited to bring this investment strategy to market.
The launch comes amid a banner year for so-called “definite earnings” ETFs in the United States this year, as investors sought protection from weak and volatile markets.
They took in $5.4 billion net, according to Morningstar, compared to $3.3 billion in all of 2021 (which itself is a record), even as flows across the spectrum of ETFs only reached 35% of last year’s total. Innovator itself has seen net inflows of $2.6 billion into its defined-income ETFs so far this year.
TSLH “is a logical extension of what we’re seeing with defined-outcome ETFs, which have been hugely popular with advisors and investors who want exposure to the equity market but in a way that manages risk,” Todd said. Rosenbluth, research manager. at VettaFi.
“Tesla is one of the most volatile stocks in the US stock market and this product is going to give people exposure to a high growth company but with downside protection.”
Innovator has built a large portfolio of buffered ETFs, which offer some degree of downside protection, based on indices such as the S&P 500.
However, TSLH differs from most of its offerings in that it instead has a hard floor – investors are fully liable for the first 10 percent of any sale in a quarter, but are fully protected thereafter. .
“For some of these high-beta stocks, the problem is that there can be a really big move. What people are looking for is protection against a big downtrend,” said Bond, who noted that Tesla’s share price had fallen 38% in the second quarter of this year (when it was the 11th most volatile stock in the S&P 500) after leading up 2% in the previous quarter.
TSLH will invest 90% of its assets in three-month US Treasuries, which provide the floor and use call options to set the cap, which will vary each time the ETF resets quarterly, depending on conditions. of the market.
Bond said he expected the cap to be generally higher than the original contract’s 9.29%. The fee is 79 basis points per year.
Innovator has no immediate plans to launch similar products based on other companies until it has evaluated the success of TSLH, which had a volume of $795,000 on its first day. trading on Tuesday.
“It has the potential to be a big hit, but we really don’t know until we get it out and tested. We’d like to raise $0.5 billion,” Bond said.
Investors could, of course, simply hold Tesla shares and sell them if losses approach their comfort level, without incurring a fee of 79 basis points per year.
However, Rosenbluth said that while “it’s not for everyone”, it was “mandatory to have the risk management done for the end investor without them having to do it themselves. same”.
“It’s putting a plan in place and forcing yourself to stick to it. It sets the alarm clock for you. Is it a necessary tool in the toolbox? No, but it has its use cases. It solves a problem for some people,” he said, adding that it could be useful to gain exposure to other volatile and high-profile stocks, such as Alphabet and Meta.
Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, was less convinced, however.
“You invest in Tesla because it has skyrocketing growth potential and high volatility, so why would you sacrifice any of that?” Lamont asked. “If you want less risk, put [Tesla] in a well-diversified portfolio. You can do it yourself without paying 80bp.
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