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There follows a discussion of one class of derivatives, called "autocallables." At base, banks are the counterparties in the autocallable trade, so they have an incentive to hope for market stability which, in part, is caused by their own need to busy "insurance" against their exposure to these options. Sindreu summarizes:If you bought so-called structured products recently, you have plenty of company. But is precisely their popularity that could make them - and perhaps the entire stock market - riskier than they seem ... The bargain often appeals to less-sophisticated investors who otherwise might not dabble in complex derivatives. For banks they bring in fat fees.
His conclusion: you shouldn't trust the Vix as a gauge of potential trouble. Quoting Jeffrey Yu of BNY Mellon, "Low volatility begets low volatility. Until something goes wrong."So autocallables look attractive because the stock market is calm, but the market is calm because people are buying so many autocallables. The feedback loop is reminiscent of the one created by funds that directly wagered against volatility back in 2017 and 2018. When a bout of selling broke the cycle, banks stopped hedging, volatility exploded and the market tanked.
© 2015 Mutual Fund Observer. All rights reserved.
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Comments
I do recall a recent conversation with Kevin Simpson of DIVO fame, indicating that high volatility enhances the distribution potential of running a covered call ETF...FWIW.
I would be interested in your opinion of DIVO.
But now,
"Crack that whip."
DIVO is a call-writing funds. It's lags the industry giant JEPI and is more expensive too. In the up markets like this, it may be covering its calls, or its stocks are being called away. But that is the deal - you give up some upside for options income. Here are the charts for JEPI, DIVO, IVV/SP500.
https://stockcharts.com/h-perf/ui?s=JEPI&compare=DIVO,IVV&id=p47538115979
For me, JEPI does not have enough of a track record. And I am not sold on the idea of writing calls against entire indexes.
If I set MFO premium to a five-year window, DIVO's APR out performs all of the other ETF's in the Options Arbitrage category, and with respectable Martin and Sortino scores. Over its seven year history it outperforms its competitors, and has the best Martin and Sortino scores. If one only looks back a year, then DIVO and JEPI are getting smoked by the majority of etf's in the category.
For my purposes, DIVO was competing with AMFFX rather than JEPI. DIVO is cheaper than AMFFX. DIVO versus AMFFX.
Yet another dinky linky.
I was not familiar with AMFFX and so looked it up. Still can not figure out why you compared it with DIVO. Please say more / share more.
P.S.: For me, derivative income equity funds are a different animal than historical traditional equity income funds. But there may be similarities between them that may be compelling for others and i would like to understand.
Here is what the prospectus has to say about that part of their strategy: That doesn't sound crazy to me. I can't speak to why Lipper considers it an equity-income fund.