Inside Aptus’ DRSK and ACIO ETF Strategies

Diane (0:00)

All right, folks, time for our ETF watchlist segment. Joining me for this, David Wagner, Head of Equities and Portfolio Manager, Aptus Capital Advisors. Thank you for being with us. We just talked about what an unusual week this was. Very significant moves across the board in different spots, but how about the bond market? That's something you focus on greatly. Let's discuss that.

David Wagner (0:21)

Yeah, the bond market's been pretty crazy this year. Actually, it hasn't been crazy just this year. It's really been crazy over the past five years.

Obviously, the poster child there is going to be in 2022, when the S&P 500 was down 18.3 percent, and there was also a bond market route with the Bloomberg Ag down about 13 percent. What we specialize here at Aptus is thinking about bonds differently, because obviously, this market has definitely evolved over the past few years, whether it's the Fed policy of quantitative easing from 15 years ago to everything that's going on today in this market. I think Aptus, we're the innovator, I think, in everything said options, but also thinking about the bond market very differently. And DRSK, the Aptus Defined Risk ETF, it's the number one performing bond fund in Morningstar for the short-term and intermediate-term categories. And I think it really directly attacks a lot of the problems that we're seeing in the bond market today.

Diane (1:14)

Yeah, let's get into that. You said it's our Trojan horse, risk on exposure inside a bond wrapper. Tell me more about this, because we've seen a lot of volatility here going on. Why is this a good play? You talked about growth opportunities, tax inefficiency, you can handle a few of the problems, correlation problems. What does this all mean?

David Wagner (1:34)

Yeah, so how we think about bonds differently? Well, let me take a step back. At Aptus, our investment philosophy is that we want to own more stocks, less bonds, while remaining risk neutral. And we just don't think that bonds are going to be the insulative source, lowering or dampening volatility moving forward into the future. So I do believe DRSK, we call it the Trojan horse because it is a bond fund, but it helps you add more risk on ownership to your overall allocation through call options. So, Diane, bonds, they kind of have three different problems in my mind. The first one is going to be that they don't have any leverage to grow. The second problem is that they have potentially problems with correlation moving forward into the future, much like what we saw in 2022 And the third problem with bonds is that they're pretty tax inefficient. And DRSK really attacks the first two problems, the growth problem and the correlation problem. But if you look underneath the hood of DRSK, about 95% of the strategy is going to be in corporate laddered bonds with a duration of about 5.2. That's what makes it a bond fund. But what differentiates itself relative to peers where we can actually have that moniker of being the number one bond fund in Morningstar from a performance since inception perspective is the other 5%.

We own about 4.5% in different call options on individual stocks and the S&P 500 That directly attacks that first problem of fixed income, that fixed income does not have growth levers. Obviously, when you have call options in the strategy, you definitely have that. But for the second problem with fixed income is that correlation problem. That last half percent of the strategy, we're actually owning puts on the S&P 500 Because you can't say guarantee in this industry, but if the market goes down, there's definitely a high propensity that your put options are actually going to increase in value if there is some type of market volatility. So I think it's a great strategy owned over longer periods of time, specifically as a satellite to your core beta exposure within your fixed income sleeve.

Diane (3:27)

You said defined risk, DRSK, and that it does well when equities are rallying and bond yields are stable or falling a bit. This is the environment where it probably does best. Collared Investment Opportunity ETF, ACIO is the ticker. Tell me more about that.

David Wagner (3:45)

ACIO is actually the largest strategy that we have here at Aptus. Well, DRSK, there's really no other strategies like that out there in the market. You know, ACIO kind of, we took a different approach when we created the strategy back in 2019

We saw an opportunity within the hedged equity space to make a better mousetrap, meaning that we do believe that we are the options experts here at Aptus based out of LA, and that stands for Lower Alabama. But we recognized that there's a lot of efficiencies with a lot of the old school, antiquated hedged equity strategies, and ACIO directly attacks a lot of those two problems. So relative to our peers, ACIO, we have two distinct advantages, in my opinion. We have a structural advantage and a deployment advantage. And on the structural advantage, what we're doing differently is we're going to own a basket of stocks that's highly correlated to the S&P 500, a correlation about 0.99. And then we're going to actually write calls on the individual stocks, which is where we differentiate ourselves versus our peers. A lot of them just write the calls on the overall index. And then we use the subsidized long puts on the S&P 500 from the premium collected on those written calls on those individual stocks to make sure we have protection on the downside, because that's what hedged equity strategy is there for. You want to make sure you protect on the downside. And where we differentiate ourselves in there is that we can have a higher ceiling for our strategy since we're writing calls on the individual stocks and not the index itself. But then we have that second advantage, and it's going to be your deployment advantage. A lot of our well-respected peers out there, as we respect ourselves, they're very much calendar constrained, where they can only write their options at the end of the quarter, at the end of the month. So they're more price takers when it comes to what they have to pay for the options because they recalibrate their strategy on the exact same day within the quarter or within the year.