SVOL: Generating Alpha With A Unique Income Portfolio Diversifier

seekingalpha10-29

SVOL offers investors a unique 16.79% yielding, tax-efficient strategy combining VIX futures contracts and fixed income investments, providing high income and diversification in an equity portfolio....

Source Link

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

We need your insight to fill this gap

Leave a comment

{"i18n":{"language":"en_US"},"isChannel":false,"data":{"share":"https://ttm.financial/m/news/2479280791?lang=en_US&edition=fundamental","thumbnail":"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1384646810/image_1384646810.jpg","is_english":true,"pubTime":"2024-10-29 23:20","share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","id":"2479280791","market":"hk","top_or_hot":-1,"title":"SVOL: Generating Alpha With A Unique Income Portfolio Diversifier","media":"seekingalpha","content":"<div>\n<p>SVOL offers investors a unique 16.79% yielding, tax-efficient strategy combining VIX futures contracts and fixed income investments, providing high income and diversification in an equity portfolio....</p>\n\n<a href=\"https://seekingalpha.com/article/4730407-svol-generating-alpha-with-a-unique-income-portfolio-diversifier\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>SVOL: Generating Alpha With A Unique Income Portfolio Diversifier</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nSVOL: Generating Alpha With A Unique Income Portfolio Diversifier\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-10-29 23:20 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4730407-svol-generating-alpha-with-a-unique-income-portfolio-diversifier><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>SVOL offers investors a unique 16.79% yielding, tax-efficient strategy combining VIX futures contracts and fixed income investments, providing high income and diversification in an equity portfolio....</p>\n\n<a href=\"https://seekingalpha.com/article/4730407-svol-generating-alpha-with-a-unique-income-portfolio-diversifier\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"SVOL","symbol_name":"Simplify Volatility Premium ETF","start_time":0,"source_url":"https://seekingalpha.com/article/4730407-svol-generating-alpha-with-a-unique-income-portfolio-diversifier","article_id":"2479280791","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1384646810/image_1384646810.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2479280791","pubTimestamp":1730215217,"columns":[],"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"SVOL offers investors a unique 16.79% yielding, tax-efficient strategy combining VIX futures contracts and fixed income investments, providing high income and diversification in an equity portfolio.Th","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":["rate"],"viewcount":null,"language":"en","relate_stocks":{"SVOL":"Simplify Volatility Premium ETF"},"translate_title":"SVOL：通过独特的收入投资组合多元化创造阿尔法","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"SVOL":0.9},"content_text":"SVOL offers investors a unique 16.79% yielding, tax-efficient strategy combining VIX futures contracts and fixed income investments, providing high income and diversification in an equity portfolio.The fund has outperformed the S&P 500 since its inception with half the correlation to the market and higher risk-adjusted returns.Although the fund has proven resilient to sharper spikes in market volatility, it remains untested to Black Swan events.Bet_Noire  Picking the right stocks, ETFs, and index funds is a difficult task when trying to generate alpha in portfolios. The price action of equities often moves up and down in constant, sometimes dramatic flux, challenging investors' underlying thesis. Whether the market is going up or down though, Simplify Volatility Premium ETF (NYSEARCA:SVOL) stands to generate high income with a TTM yield of 16.79% using VIX futures and fixed income investments, offering a unique equity diversification opportunity for portfolios seeking income and lower correlation to the market. Fund Strategy and Management Incepted in May 2021 with $1.21B AUM, per the fund's prospectus, SVOL Seeks to provide investment results, before fees and expenses, that correspond to approximately one-fifth to three-tenths (-0.2x to -0.3x) the inverse of the performance of the CBOE Volatility Index (VIX) short-term futures index while also seeking to mitigate extreme volatility. The fund's objective further extrapolates into a structure to  Allocate 20-30% of assets to short VIX futures. Provide high income. Protect against extreme volatility.  Data by YCharts The S&P VIX Index (VIX) represents the market volatility over the next 30 days. Since the VIX moves inversely with stock prices, shorting the VIX is positively correlated with stock equities. Below is the VIX from the last 10 years, with sharp spikes corresponding to significant level changes, such as the 2020 COVID crash. VIX Roll Yield Thesis (Simplify Asset Management) The underlying fund strategy is derived from the fact that historically, the average price of the VIX futures contracts increased about 85% of the time. So, SVOL sells short VIX futures contracts and rides the options contracts down in time, taking advantage of theta decay, before rolling the contracts to the next month's futures contract. This is what the fund calls \"VIX roll yield\". The management strategy then follows these 3 steps:  Harvest VIX roll yield selling VIX futures short on 20-30% of the fund's assets as mentioned above. Invest the remaining majority of assets, 70-80%, in income-producing securities such as Treasury Bills, notes, Treasury Inflation-Protected Securities (TIPS), fixed income ETFs, sell fixed income options to generate additional income, and/or acquire fixed income securities at attractive prices. Manage tail risk via term structuring positioning. When the VIX is high, the fund will sell nearer-term futures contracts, which have a higher beta. When the VIX is lower, the fund will sell longer-term futures contracts, which have a lower beta. The fund will also buy tail hedges using call and put options to protect against significant movements in either direction.  SVOL Holdings (Seeking Alpha) Performance Since its inception, SVOL has outperformed the S&P 500 in terms of total risk-adjusted returns, sweeping every category: higher returns, lower volatility, and higher risk-adjusted performance. The below table is from the portfolio visualizer.   Performance Metric SVOL SPY   Annualized Return (CAGR) 9.68% 8.71%   Standard Deviation (annualized) 10.69% 17.81%   Maximum Drawdown -11.83% -23.93%   Beta 0.48 0.98   Alpha (annualized) 5.57% 1.29%   Sharpe Ratio 0.57 0.34   Sortino Ratio 0.86 0.51   Treynor Ratio 12.35 6.19   Click to enlarge Another interesting stat is the 5.57% alpha SVOL has generated. This is after all the namesake of \"Seeking Alpha\" and I believe SVOL has definitely succeeded in adding performance and diversification in the equity space. Past performance is not indicative of future results, but obviously, the strategy worked well the last 3 or so years under various market conditions and volatility in both directions. The fund's beta was also 0.48 or around half the correlation to the overall market, really establishing itself as a diversified investment. Additionally, unlike covered call ETFs, which I've written on a fair bit, SVOL does not have a cap on potential gains. Stock returns are driven by earnings and market multiples, while SVOL is driven by curve steepness and curve level. Distributions As this is an actively managed fund, so are the distributions from its 16.79% yield. Fund management issues a stable distribution through the fund's estimated long-term carry: the fixed income investments + VIX roll yield. The goal is to keep the distribution stable, even though month to month the income could be higher or lower, to make it easier for investors to predict their cash flow. Accounting Treatment of Distributions (Simplify Asset Management) SVOL's distributions are only classified as ordinary income, which is taxed at your ordinary marginal tax rates, or Return of Capital (ROC). The ROC classification is purely used for accounting purposes, not as a performance result of the fund. On the portion of the distribution each year that is classified as ROC, an investors cost basis will be adjusted, making that portion of their income in the short term seem \"tax-free\" but really, it makes future ROC distributions deferred long-term capital gains once an investors cost basis is $0/share. The majority of the distributions, 73%, so far, in 2024 are classified as ROC, making for a pretty tax-efficient holding, especially in the high-yield space.   Month Net Income ROC Total Distribution Per Share % ROC        January $0.1469 $0.1531 $0.3000 51%   February $0.1107 $0.1893 $0.3000 63%   March $0.1188 $0.1812 $0.3000 60%   April $0.0427 $0.2573 $0.3000 86%   May $0.1036 $0.1964 $0.3000 65%   June $0.1063 $0.1937 $0.3000 65%   July $0.0372 $0.2628 $0.3000 88%   August $0.0305 $0.2695 $0.3000 90%   September $0.0321 $0.2479 $0.2800 89%   October - - - -   November - - - -   December - - - -   Average $0.08 $0.22 $0.30 73%   Click to enlarge Risk Analysis My two main concerns with SVOL are the stability of the distribution and how it will handle a big drop in the market. If the VIX term structure flattens for an extended period of time or if interest rates, like we are seeing now, dramatically decline, this impacts how much income the fund can earn from the fixed income portion of the portfolio, which recall makes up 70-80% of the fund's assets. That being said, this brings into question the recent dividend cut from $0.30 to $0.28. Actually, this is not the first cut: in July 2023 the fund cut its dividend from $0.32 to $0.30. Data by YCharts The ETF price has been reasonably stable over the last 2 years, so these cuts are yield reductions. That does make it a little better as it indicates a stable NAV and is in accordance with their strategy. The payouts are something to track moving forward with more rate cuts inbound, does that mean more dividend cuts? I'm actually fine with a reduced yield here, in fact, an 8% yield is the sweet spot in my opinion. I'd prefer a stable NAV and payout to an unstable NAV and payout. Data by YCharts How SVOL will handle a black swan event, like the COVID-19 drop in 2020 is another concern investors should have. Though the fund was tested recently in August 2024 and seemed to recover well, if we zoom out back to 2020, we see a much bigger spike in volatility that SVOL has not yet faced. A drop-black swan would be the ultimate test for SVOL's strategy and recovery. Data by YCharts Outlook Overall, I believe SVOL can generate alpha within the equities portion of an investor's portfolio and offer diversification in the form of volatility premium vs. traditional equity metrics. While I have a few concerns, the fund's total returns and risk-adjusted returns are hard to ignore, I rate SVOL as a Buy. Volatility as a Portfolio Diversifier (Simplify Asset Management)  Although a majority of the ETF is fixed income securities, keep in mind the risk profile is that of equities/the market. Therefore, I think 3-15% is a reasonable and realistic allocation depending on how aggressive an investor or particularly a retiree is. I like below $22/share as a solid entry point and below $21/share even better.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2479280791"}