Simplify ETFs has been firing on all cylinders since the launch of their first three option-based ETFs in early September 2020. One year on, the New York-based asset manager has amassed over $630 million in assets, representing 12 funds.
With the leadership team composed of prior hedge-fund, quant and PIMCO executives, the advisor has all it needs to succeed. Its array of funds address today’s investor issues and concerns such as volatility, rising interest rates, inflation, thematic, as well as income investing.
Paul Kim, Simplify’s CEO and co-founder, is an ETF industry veteran whose experience spans several successful ETF business launches and innovations. His most recent venture with Simplify seeks to make scientific use of option strategies to address some of the most challenging problems facing the markets today.
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Kim On Current And Future Economic Environment
Kim spoke with IBD to provide insights on his firm, some of its best ETFs and strategies, as well as the current and future economic environment. He also shared the kind of clients Simplify serves.
IBD: What is the mission of Simplify and why did you start the firm?
Paul Kim: Simplify Asset Management is an SEC registered RIA (Registered Investment Advisor). We are a new ETF startup comprised of ETF and asset management veterans. Our ETF platform currently comprises 12 ETFs and $630M in assets. The timing of our inception aligns mostly with recent regulatory changes including the SEC’s Derivatives Rule passed in Oct 2019. This new rule modernized the regulatory framework around the use of derivatives by registered investment companies, including ETFs. And it is integral to allowing the innovative strategies that Simplify offers.
FinTech Firm That Brings Disruptive Management To Best ETFs
IBD: You call yourself a disruptive money manager. What do you mean by that?
Kim: We are a FinTech company that seeks to disrupt the wealth management and asset management industries by democratizing access to institutional caliber solutions and talent. We offer innovative portfolio building blocks that incorporate hedges and overlays to improve risk adjusted returns for asset allocators and investors. We also seek to disrupt the hedge fund world by bringing sophisticated strategies and exposures that were inaccessible to most investors.
IBD: How does Simplify differentiate itself from other ETF issuers?
Kim: Unlike most ETF providers our leadership team is from the institutional asset management and hedge fund worlds. Our caliber of talent can go toe to toe with top hedge funds. We have a particular niche around “long volatility” strategies — in other words we are experts at options. What makes us unusual is that we are comfortable buying options and not just selling them.
IBD: What is your background in the industry?
Unique Solutions, Commercial Viability To Build The Best ETFs
Kim: Simplify is my third ETF startup. The first was building PIMCO’s ETF platform from the ground up right after the financial crisis. PIMCO quickly established itself as the leader in actively managed fixed income ETFs. It is over $26B in AUM today. Next in 2015, I joined Principal Global Investors to help launch and build their $5B ETF platform. I am a veteran in the ETF industry and have enjoyed every second of the journey. It’s much more fun to be a part of a growing, disruptive industry.
IBD: What is your overall methodology for creating and launching an ETF?
Kim: Overlap of a big investment problem; unique solution; and commercial viability.
The first step is to determine if there is current or future demand. In the investment world, in terms of financial products, you’re looking for problems in people’s investing portfolio. For example, are they worried about inflation, or rising interest rates, or market volatility, or do they need a significant amount of income?
Seizing Market Share, Protecting Income
As the product provider, in our case the product being an ETF, the goal is to try to deliver a very unique set of solutions, or the best-executed solutions, to have a chance to take market share.
IBD: What are some examples of funds that address client problems?
Kim: Simplify Interest Rate Hedge (PFIX) is our interest-rate hedge strategy. Most investor portfolios are oriented to benefit when rates go down. And that’s been a benefit of the fixed-income market that’s had a tailwind of interest rates falling over the last four decades. Now, the question is at what point do interest rates reverse and start going up? Are we starting to see inflation or the limits of what central banks can do?
IBD: So, when interest rates go up, how does one protect their portfolio?
Kim: Our interest rate strategy delivers a way to protect an entire portfolio with a very modest allocation. Our solution is unique because we provide access to very unique, long-term interest rate options that have not previously been available to the vast majority of the retail as well as many institutional clients.
Ideal Clients For Best ETFs?
It’s been a very popular strategy, launched in May, and it has over $90 million in AUM already — that’s very fast growth.
A second strategy that we are very excited about is Simplify U.S. Equity PLUS Downside Convexity (SPD). It’s U.S. large cap with downside convexity. Convexity is for us a way to hedge tail events. SPD provides U.S. investors with exposure to the S&P 500 but also hedges the downside. So, if markets start falling you have protection built inside the fund with the use of long-term put options. Those will increase in value if the S&P 500 sells off. That’s a concept of providing protection while also allowing people to stay invested in equities.
IBD: Who is your ideal client?
Kim: Long-term focused; forward looking and as focused on risk as return. Most of our clients are large RIAs or institutional asset managers.
IBD: Which ETFs have been the most successful so far (inflows) and why?
What Are Simplify’s Best ETFs?
Kim: SPD happens to be our first and largest. S&P 500 is a very popular exposure in portfolios. Given the poor outlook on bonds as well as elevated valuations in risk assets, having a direct hedge to severe market drawdowns is very timely.
IBD: Which ones have been the best performing ones?
Kim: We have the fortune of strong market returns since launching our ETFs. Many of our ETFs have delivered strong returns while also hedging extreme market volatility.
IBD: Why and how did they outperform?
Kim: On strategies like Simplify U.S. Equity PLUS Upside Convexity (SPUC) or Simplify U.S. Equity PLUS GBTC (SPBC), they had upside exposure as the markets rallied. SPUC has calls inside of it. If you look at trailing YTD, or last 12 months, the U.S. equity market has done nothing but continue to rally. So, these calls inside of these ETFs have significantly outperformed. SPUC is up 23.6% YTD, while SPBC has risen 5.38% since its inception in May.
Non-Traditional Income Strategies
Simplify Volatility Premium (SVOL) is a nontraditional income strategy that sells VIX futures. So, it gets very complicated for a lot of investors, but the general idea is: When you are investing, you’re collecting a risk premium. In high yield, that comes as credit or interest-rate spread and this strategy has a volatility premium.
By selling the next forward contract and holding it, and then rolling it in the following month — that simple action is the carry trade, when you’re selling something and then buying at a later time. And that carry trade historically has been a very attractive risk premia, to the tune of about 10% or 11% in our strategy. But recently, it’s been more of a 20% to 25% carry. So, in a world of very low interest rates, it becomes very interesting to have this accessible risk premia available generate carry. The fund is up 6.35% since its inception in May.
IBD: What is your outlook for 2021 and 2022?
Kim: Greater uncertainty and volatility; higher inflation; higher taxes; slowing growth and growing threat from geopolitical events or policy mistakes.
Kim: Upcoming ‘Significant Market Volatility’
The only thing that’s certain is uncertainty. So much of today is the output of unprecedented policies and market changes, and the view of whether that unprecedented change can continue to go on forever.
For example, can the Fed keep their foot on the accelerator forever, or is the bill coming due at some point and are there limits to what they can do?
I think we’re getting closer to that point. Although no one is able to time exactly when, at some point those policies will reverse and I think there will be very significant market volatility.
The second thing we see is massive inflationary pressures (due to those policies and because of Covid). And if those pressures are not transitory, if they don’t go away in a very short period, we may face a very different investing environment than we have in the past 40 years.
We’re seeing some unwinding of all the things that have helped keep inflation low. We’re seeing the reversal of globalization, many more trade conflicts and significant demographic change. If you print enough money, at some point you’re going to see inflation. And I think just the pace of that support has created a ton of inflationary pressures.
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