The newest equity income fund from First Trust and Vest owns no equities. It holds Treasury bills, and it holds them by buying call options on an ETF that holds Treasury bills.
The core position is a set of deep in-the-money FLEX call options on the iShares 0-3 Month Treasury Bond ETF. The prospectus explains that these are priced at a discount roughly equal to the underlying ETF’s yield, and that the discount accretes to par as the options run off. The fund has, in effect, rebuilt a Treasury bill from a derivative on a fund of Treasury bills.
Alongside them sit actual Treasuries, cash equivalents or an options box spread, which is a further way of owning something that behaves like a Treasury bill. Few portfolios have ever been so thoroughly committed to the same asset by so many routes.
The equity arrives once a month as a put spread on the S&P 500. The fund sells puts struck near 105% of the index level and buys puts near 95%. If the index rises more than 5% over the month, “the options packages will expire worthless” and the fund keeps the premium. Between the two strikes, it carries the market’s losses.
The target is an annual distribution rate about 1.5% above the one-month Treasury yield before fees. The management fee is 0.65%, which leaves the investor with roughly 0.85% of that premium and the issuer with roughly 0.65%. It is a remarkably even split for an arrangement in which only one side carries the equity risk.
I recently wrote about a Canadian fund whose equity exposure came mostly from shares it had promised to buy. This one goes further and makes the equity a monthly wager laid on top of a bill. The prospectus is admirably candid that the fund “does not seek to achieve any specific level of total return performance”, and the name, to be fair, contains every ingredient. It simply lists them in order of marketing appeal rather than order of assets.
Tuttle has been launching a new fund each time the AI bottleneck moves. I recently wrote about its memory funds, and its photonics fund followed on the argument that the constraint had shifted from compute to memory to the connections between chips. This one is built for a bottleneck that has not finished moving, and the ticker is either a pun or a forecast.
The statement of additional information lists nine industries in its “AI Bottleneck Industry Group”: compute and advanced packaging, memory and storage, optical and electrical interconnect, power generation and grid, the nuclear fuel cycle, semiconductor capital equipment and test, semiconductor and electrification materials, data centre cooling and facility infrastructure, and data centre siting. A bottle with nine necks is mostly neck.
To qualify, a position in the value chain must meet “at least two of the following three criteria”: supply chain concentration, backlog or lead time, and demand inelasticity. A company must also earn at least half its revenue from one of the nine categories. The fee is 0.75%.
The risk section warns that if bottlenecks are resolved, the holdings may underperform. It is a fund that needs the problem to stay unsolved, which puts it in the same commercial position as a great many consultants.
Here is an equity premium income fund that owns equities. The base is a tax-managed portfolio designed to track the risk and return of the S&P 500, with active tax loss harvesting, and on top sits a covered call overlay written mainly on S&P 500 ETFs and the index itself, using FLEX and listed options. The fee is 0.35%.
The interesting sentence is about tax. The prospectus says the combination of harvesting and call writing “may permit the Fund to pay a significant portion of its monthly distribution as return of capital”. In most income funds, return of capital is the line everyone hopes will go unnoticed. Here it is the design.
The usual trade-off is set out plainly: in a sharp rising market the fund “could significantly underperform the market”. That is the price of being paid monthly to own the S&P 500, and AB has had the courtesy to say so in a sentence anyone can read.
Man Group’s US version of this strategy makes an unusual offer. “For every $1 invested, the fund delivers equal exposure to beta” in the S&P 500, plus a further dollar of exposure to Man AHL’s trend-following models, which the firm describes as “forged over 35 years of experience”. Two dollars of exposure for each dollar invested is a hedge fund idea dressed for a wealth platform.
The European version has now arrived in dollar-hedged and sterling-hedged classes, alongside a UCITS version of Man’s active global infrastructure fund. Man’s own ETF page still lists only its US funds. For a firm with 35 years of trend following behind it, it has been unusually slow to follow its own trend.
Fiduciary Management has run value portfolios out of Milwaukee for a very long time, and has taken almost as long to arrive at an ETF. One trade headline summed up the journey as “FMI Files for First ETF, Again”.
The mandate fits on an index card. It holds at least 80% in equities, mainly a limited number of large global companies, at least 30% outside the US, each chosen as a good business at a value price in pursuit of “above average performance with below average risk”. The management fee is 0.60%, waived to a net 0.55%.