What if there were a better version of popular buffer ETFs that limits downside losses in exchange for a cap on upside performance? Ben Fulton, chief executive of WEBs Investments in Park City, Utah, believes he has the answer.
The WEBs Defined Volatility SPY ETF (DVSP) and the WEBs Defined Volatility QQQ ETF (DVQQ), which started trading last week, essentially seek the same outcome of buffer exchange-traded funds in the form of lower price volatility.
The main distinction, as Fulton explained, is that his ETFs operate without the embedded guardrails and instead target a level of volatility that is in line with the SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust (QQQ).
The index-tracking ETFs target the historical average volatility levels of the underlying ETFs by adding volatility when it is below average and reducing volatility when it is above average. Volatility management is accomplished by increasing cash when volatility is too high and adding to the underlying ETF’s exposure by as much as 200% when the volatility is too low.
“Our whole goal is taking existing ETFs and creating a more stable environment for investors and financial advisors who are trying to keep their clients in the markets,” Fulton said. “And we give investors a chance to outperform the traditional ETF.”
The strategy, which Fulton has back-tested going back to the financial crisis of 2008, is managing the ride investors experience by managing volatility.
While a strategy that targets average volatility is technically no different than just owning SPY or QQQ, Fulton said by taking out the peaks and valleys he expects investors to have a smoother ride.
“We compare it to a thermostat that keeps the temperature inside your house at 70 degrees all the time,” he said. “We don’t care what the temperature is outside as long as it’s 70 degrees inside.”
Regarding the historical average volatility of SPY and QQQ getting to the same place as his new funds, Fulton said, “That’s like saying the average temperature of Park City is 60 degrees, but you wouldn’t want to live outside year-round.”
The WEBs ETFs charge 85 basis points, and Fulton said there are more to come.
“You could use buffered ETFs and pay for the downside protection with upside caps,” he said. “Or you could go with us and not have any caps.”
