Need to Climb Rungs of Income? Say Howdy to ‘HELO’

Posted On Oct 5, 2023 By admin With Comments Off

Apple

Investors who like to grow their returns in sequential, gradated form have a new exchange-traded fund (ETF) to meet and greet.

On Tuesday, September 26, JPMorgan launched the Avantis U.S. Large Cap Equity ETF on the New York Stock Exchange, Arca, under the friendly-sounding ticker “HELO.”

HELO provides hedged exposure to U.S. large-cap stocks. It deploys a “laddered options strategy” to protect investors from downside risk. So-called laddered options are a kind of exotic option that allows the holder to lock in partial profits once the underlying stock has reached predetermined price levels (called “rungs”). HELO’s laddered overlay consists of three hedges that each run for three months and are separated one month apart.

HELO says it is “maintaining characteristics similar” to attempts to the S&P 500 and aims to match much of the gains of the S&P 500 while limiting volatility and downside risk. It currently has 170 holdings, with information technology as the largest sector (27.4%). Microsoft and Apple are its largest holdings at a weighting of over 7% each.

The ETF is jointly led by portfolio managers Hamilton Reiner and Raffaele Zingone, who together have almost seven decades of professional experience between them.

“Regardless of the environment, equity investors are focused on managing risk,” Reiner said. “We expect strong demand for HELO as investors look for outcome-oriented solutions that provide the hedged experience through the ETF wrapper.”

This sentiment was mirrored by JPMorgan’s global head of ETF solutions, Bryon Lake.

“We listen to our clients,” Lake said. “And their request is to have a strategy like this available in the ETF wrapper. Hamilton and team have demonstrated strong success with active ETFs like JEPI and JEPQ.”

JPMorgan is already home to the largest active ETFs in the world. In April, JPMorgan Equity Premium Income ETF (“JEPI”) usurped its colleague, JPMorgan Ultra-Short Income ETF (“JPST”), which had previously held the title of biggest active ETF, reaching nearly 25 billion in assets under management.

Laddered Options

Other “laddered” strategies include building a CD (certificates of deposit) Ladder, which investors can use to schedule fixed future returns through CDs with differing maturities. So-called bond ladders use the same concept but through government or corporate debt instruments instead.

When leveraged correctly, laddering can generate higher yields from longer-term investments while still ensuring some level of liquidity.

However, investors need to remember that fixed-rate investments whose interest and principal are guaranteed have lower expected returns than more risky ones.

The same goes for laddered strategy stocks, as HELO’s prospectus reads, “as a result of selling call options to offset the costs associated with the options overlay strategy, some upside may be foregone in certain market environments.”

The ladder effect also comes with a step up in cost from passive index funds.

While most passive index funds charge well under 0.20% in annual fees, HELO comes with an expense ratio of 0.50%.

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