Over the last couple of years, there has been a massive increase in new ETFs that employ more advanced portfolio management and options strategies. Earlier this year, we launched our ETF Income Edge service to help investors navigate the sometimes-bewildering world of these new types of ETFs. For example, we explain how an ETF can show a 100%-plus distribution yield.

News of a new ETF seems to hit my inbox at least once a week. It’s interesting to dig into their prospectuses and try to figure out the portfolio strategy. Then, I try to wait three to six months to see how the strategy works out in actual returns.

Most of these ETFs use covered call options trading to allow the funds to pay huge dividend yields. It’s easy for the ETF marketing teams to lead with an excellent yield. There is the occasional new ETF that is not yield-focused. These funds often use tactics and strategies similar to those used in private hedge funds.

The Simplify Wolfe US Equity 150/50 ETF (WUSA) launched on September 23, 2024. Simplify has a strong track record of introducing innovative ETFs to the market.

Here are the strategy details from the new ETF’s fact sheet:

·       WUSA will invest in two baskets of stocks—a long basket of 250 U.S. stocks and a short basket of 150 U.S. stocks—via total return swaps.

·       The portfolio’s equity ranking system is driven by a proprietary, multi-factor, machine-learning stock selection model developed by Wolfe Research, the fund’s subadvisor and industry-leading quantitative research firm.

·       A machine learning algorithm analyzes over 300 factors across thousands of data points to detect patterns that can help forecast securities prices. Unlike a quantitative model designed by humans, a machine learning algorithm “learns” from historical data and develops its own model by identifying statistically significant patterns.

·       The advantage of the 150/50 allocation is that it widens the spectrum of returns (positive or negative) that the fund can potentially harvest in the pursuit of capital appreciation.

The strategy of going long on the best stocks and short on potentially bad stocks could provide returns significantly better than those from an index-tracking ETF such as the SPDR S&P 500 ETF (SPY).

Only time will tell whether the WUSA strategy is a winner. I am intrigued by the fund and will monitor its returns, especially when compared to the major market indexes.