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‘Spaghetti Cannon’ Filings for 25 Trendy ETFs Raising Concerns
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A U.S. exchange-traded fund issuer may have hit “peak 2024” with plans to launch 25 ETFs that would combine two of today’s hottest trends: leveraged exposure and option writing. Purchase covered.
New York-based GraniteShares has filed to launch a family of “YieldBoost” ETFs, many of which are based on single stocks, that would sell puts on leveraged ETFs – again many unique shares – issued by competing providers.
ETFs would potentially benefit from significant option writing premium income, but would combine a capped capital return with uncapped downside risk from the underlying leveraged exposure.
“I was shocked by this filing,” said Bryan Armour, director of passive strategies research in North America, likening it to a “spaghetti cannon.”
“Product development was about throwing as much spaghetti at the wall as possible and then seeing what sticks,” Armor added.
“Wow, this is peak 2024,” added Elisabeth Kashner, director of global fund analysis at FactSet.
The ETFs offered by GraniteShares would invest in a range of unique assets, from individual stocks, such as each of the Magnificent Seven, to bitcoin, gold, volatility and a selection of stock indices and sectors .
They would then sell puts on ETFs with leverage between 1.5 and 3 times issued by providers such as Direxion and ProShares. The collateral would be primarily invested in fixed income instruments.
The maximum gain would be the premium income generated from selling the options, plus “a limited amount of upside appreciation” up to the option’s strike price – assuming the price of the underlying ETF increases up to this level.
However, investors would be fully exposed to any losses suffered by the underlying ETF – which could easily be large given its leveraged nature – only cushioned by premium income, which is collected regardless. arrived.
As such, the YieldBoost ETFs offered leverage two of the hottest trends in the US ETF market.
Covered call ETFs selling options have boomed in recent years, as the JPMorgan example shows. very popular High Income Equity ETFs (JEPI), whose assets jumped to $33.6 billion, making it the most popular active ETF in the world.
U.S.-listed ETFs classified as “income derivatives” by Morningstar Direct, which include most covered call vehicles, hit a record $70.7 billion in assets at the end of April, up from just $3 billion end of 2020.
Leveraged and inverse ETFs have also attracted more attention, although their growth has not been as dizzying, with total assets increasing from $54.4 billion at the end of 2020 to $94.9 billion in April, according to Morningstar.
“Covered call ETFs have been one of the most popular trends over the past year, while single stock leveraged ETFs have been among the best performing products over the past year. the same period,” said Todd Rosenbluth, head of research at VettaFi, a consulting firm. “It is therefore not surprising that an asset manager would want to combine these elements into a single product.”
Rosenbluth notably alluded to the success of NVDLThe GraniteShares ETF provides 2x daily exposure to chipmaker Nvidia, which has returned 474% since its inception in December 2022 and currently holds $2.6 billion.
“Tackling investors’ gambling mentality has paid off big for GraniteShares with its leveraged single-stock ETFs – most of which have struggled, but the success of its 2x leveraged Nvidia ETF earned him a solid salary,” Armor said.
“This success paid the bill for the latest YieldBoost ETF attack.”
Will Rhind, managing director of GraniteShares, said: “We have a customer base that is clamoring for revenue.”
“It is above all a profitable product. This is really an extension of some of the other income strategies we’ve seen in the market over the past couple of years, from broad indexes to individual stocks.
“This is a very popular category because it has been able to generate yield that is not available from either traditional fixed income or dividend paying stocks.”
The inherently volatile nature of the underlying ETFs means that these YieldBoosts may be able to generate more options income than other covered call strategies, although their structure also increases the likelihood of a significant decline in price of the underlying asset.
“In theory, the more volatile you are, the more revenue you should be able to generate,” Rhind said. “There is a high demand for this. »
FactSet’s Kashner, a former options trader, was unconvinced by the investment logic of YieldBoost ETFs, however.
“The building block is targeted exposure and most of the time investors who go for targeted exposure do so because they believe the underlying is going up and they want more upside,” he said. -she declared.
“I can’t understand the investment logic behind this: ‘I think Meta is going to the moon but not too far’? You only get part of the upside and you forgo dividends.
“What percentage of investors will understand how these funds work and what the potential costs and benefits are? » asked Kashner, adding that with other covered call strategies such as JEPI, “the number of investors who have put their money into it may not match the number of investors who understand it.”
Armor was even more direct. “Investors in these ETFs may be shocked to learn that these high-risk strategies have limited upside, most downsides, and many tax-inefficient returns. Investors would be better off avoiding them,” he said.
If the U.S. Securities and Exchange Commission does not object to the filings, the ETFs could launch on August 7. Rhind said he expected the fees to be in line with similar covered call ETFs, at around 70-100 basis points.