Morgan Stanley and Goldman Sachs have launched new actively managed derivative-based ETFs in response to “strong client demand for downside protection, buffer and managed outcome strategies”.

A batch of five actively-managed exchange-traded fund (ETFs) has been added to Morgan Stanley Investment Management (MSIM)’s ETF platform, which went live on 1 February.

We have seen strong client demand for downside protection, buffer and managed outcome strategies - Anthony Rochte, MSIM

Listed on NYSE Arca, they include two maiden derivative-based ETFs - Parametric Equity Premium Income ETF (PAPI) and Parametric Hedged Equity ETF (PHEQ) – in partnership with Parametric, which was acquired by MS in 2021.

The other three ETFs are fixed income strategies branded under Eaton Vance, an investment management firm based in Boston.

“We have seen strong client demand for downside protection, buffer and managed outcome strategies,” Anthony Rochte (pictured), global head of ETFs at MSIM, told SRP.

“This corner of the US ETF market has more than doubled in size over the last five years, and this category of ETFs is driving a significant portion of continued industry growth,” said Rochte citing external data.

As of 31 October, each of the two derivative-based ETFs recorded net assets of US$20.7m since the launch two weeks ago.

Benchmarked against the Russell 1000 Value Index, the alternative income strategy (PAPI) seeks to provide consistent monthly income while maintaining prospects for capital appreciation with the Adviser and Parametric Portfolio Associates acting as the sub-advisor and J.P. Morgan Chase Bank as custodian.

To fulfil the objective, the ETF creates an actively-managed portfolio of dividend-paying equity securities that primarily include common stocks of US companies selected from the Russell 3000 Index and writes option contracts on the SPDR S&P 500 ETF Trust or on the S&P 500 to generate additional yield.

“PAPI utilises a strategic, rules-based investment approach to deliver a sustainable source of monthly income that is derived from two distinct sources – qualified equity dividends and option premium income – and averages 7% to 8% per year while maintaining significant equity upside participation,” added Rochte.

With a monthly distribution frequency, the product had 850,000 outstanding shares and a daily volume of 351 as at the end of October.

In the meantime, the hedge equity strategy (PHEQ) provides capital appreciation while limiting losses experienced by investors through the incorporation of a put spread collar strategy, known as ‘buffer’.

“PHEQ is a low cost, diversified, efficient and transparent hedged equity solution that delivers a more consistent risk-return profile than typical ‘defined outcome’ products,” said Rochte.

The option strategy is constructed by buying a put option at a higher strike while writing a put option at a relatively lower strike price and simultaneously selling a call option that substantially offsets the cost of the put option spread.

The S&P 500 is the benchmark index. With a quarterly distribution frequency, the ETF had 850,000 outstanding shares and a daily volume of 118 as of 31 October.

Following the latest addition, MSIM currently has 11 ETFs on shelf, which together delivered total net assets of US$495.2m as of 31 October. 

Tapping into growth

The assets under management (AuM) of US listed derivative strategy ETFs reached US$96.4 billion at the end of September, an 85% increase year-on-year. The growth was facilitated by a 33% increase in the number of live derivative-based funds, which came to 363, according to Morningstar’s data compiled by Global X ETFs.

MSIM’s trackers come on the heels of a pair of defined outcome ETFs launched by Goldman Sachs Asset Management (GSAM) a week earlier.

The Goldman Sachs S&P 500 Core Premium Income ETF (GPIX) and the Goldman Sachs Nasdaq 100 Core Premium Income ETF (GPIQ) are two actively managed ETFs seeking to generate income and growth through an options overwrite strategy.

Michael Crinieri (right), global head of exchange traded funds at GSAM, noted that the recent extended periods of volatility, have triggered new demand ‘to enhance core portfolio holdings with products that can potentially deliver consistent monthly income, lower volatility, and offer a diverse source of yield’.

To generate income, both ETFs sell call options on a varying percentage of the market value of the equity investments in the portfolio. They may invest in flexible exchange options (FLEX options), which are customised exchange-traded option contracts available through the Chicago Board Option Exchange (CBOE).

As of 31 October, the GPIX and GPIQ posted net assets of US$8.0m and US$7.9m, respectively.

GSAM had more than US$30 billion AuM across 43 ETF strategies as of 30 September.

Meanwhile, J.P. Morgan’s flagship Equity Premium Income ETF (JEPI), which went live in May 2020, has gathered US$29.1 billion net assets with 552,875,000 outstanding shares as of 31 October.

The fund has the same objective as Goldman Sachs’ GPIX and GPIQ of providing income while maintaining prospects for capital appreciation.

The underlying strategy creates an actively managed portfolio of equity securities comprised significantly of those included in the fund’s primary benchmark, the S&P 500 Index, and through equity-linked notes (ELNs), selling call options with exposure to the S&P 500 Index.