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ETFs that use options to make them more useful tools

Dave Nadig, CIO and Director of Research for ETF Trends, joins Yahoo Finance's Melody Hahm to break down this week's ETF Report.

Video Transcript

MELODY HAHM: It's now time for our ETF report brought to you by Invesco. The market's at all-time highs, and retail investors driving thematic areas like autonomous vehicles, cloud computing, as well as clean energy. Investors are looking for ways to protect themselves on the downside while, of course, still participating in some of these gains.

Dave Nadig, the Director of Research from ETF Trends, joins us now to break it all down for us. Dave, should investors be nervous that some of these themes are actually too expensive at this point, and what are some of these new ways that you're suggesting you approach them?

DAVE NADIG: Yeah, it's a little tough to wade into this market when we're sitting here at all-time highs, so I think it's really natural for a lot of investors to be a little bit cautious right now. And in 2020, we really saw the burgeoning of a whole raft of products that use options to sort of solve this problem. One of the more interesting launches this year came from a company called Simplify, and the ticker for it was SPYC, S-P-Y-C or "spicy." And what that did was allow you to put 98% of your money in the S&P 500 but use put and call options to both protect you if you're wrong and the market goes down but also to give you a little bit of extra upside if we have a big ramp in the market, and that was a very popular product. Pulled in $40, $50 million right out of the gate.

We've recently just today seen the launch of four new products really targeted at what I would call micro themes here. And the themes that they're highlighting are things like autonomous vehicles or electric cars or fintech or cloud computing or sort of the rise we're seeing in pop-culture applications like, say, Spotify. And in each case, the funds have a very concentrated portfolio in just a handful of disruptive companies but then again use options to both protect you on the downside should you be wrong and these trends be overpriced and get hit but also give you some extra upside should these take off the way we've seen some of them take off-- say, anything related to Tesla in the last year.

So I think these are really interesting tools that help investors stay invested but give you a little bit of comfort that you're not going to get wiped out should we have another pullback like we had in March.

MELODY HAHM: As you sort of alluded to, there still is this sort of FOMO feeling, right, where folks, yes, want to be able to diversify their bets, be able to sort of hedge themselves in that way, but they do want to still dabble maybe with fractional shares. Are you seeing it as a complementary approach? How are you, you know, taking a macro approach here, suggesting that perhaps younger investors who do have more risk tolerance be able to wade through this market?

DAVE NADIG: Yeah, the way to think about these new products, these ones targeting these small themes with these concentrated portfolios, is that they're replacing single stocks. So if you're really bullish, say, on the electric-car business and autonomous vehicles, instead of just buying Tesla and hanging on for the ride, which I think a lot of investors have done, the opportunity here is to buy something like VCR, which would be the Simplify autonomous-vehicle version of this strategy, which will give you that exposure to Tesla but will also protect you a little on the downside and give you the opportunity to do even better than the underlying stocks should you be right and these themes really be driving the economy.

So the way to think about these is a single-stock replacement. I wouldn't suggest anybody be using these, say, as the core of their retirement portfolio. These are designed to be more speculative, more trading-oriented products, and I think they're really interesting. It's really kind of a new wave of products we've seen in ETFs around this strategy.

MELODY HAHM: And, of course, we are so tethered to DC when it comes to market activity. How are you anticipating this incoming administration to change any of these sort of micro themes that you're suggesting?

DAVE NADIG: Yeah, so I think that's one of the big questions we have is what does an actual full four-year cycle of a new administration look like? You know, I think investors are concerned a little bit that we could end up in a reregulated environment, if you will.

My personal belief is that things are going to be fairly steady state and a little bit calmer. So if I'm looking two to three years out, I'm hoping for and really planning for a little bit lower volatility. Still a lot of economic issues to be worked through the system, which is why these sort of downside-protection vehicles I think have caught so much investor attention.

MELODY HAHM: Thanks so much. Dave Nadig, the director of research for ETF Trends. At least we know the unknowns heading into 2021. Thanks so much for joining us today.

DAVE NADIG: Thanks for having me.