What are our options?

Asset managers are growing increasingly determined to bring options-based strategies, traditionally tools of institutional and accredited investors, to the masses. Goldman Sachs is emerging as one of the more aggressive forces in the trend. The investment bank announced yesterday that it will acquire NEOS Investments, which focuses on active, derivative income ETFs, in a deal worth up to $2.3 billion. The purchase will add 19 active income ETFs and $30 billion in assets to Goldman’s lineup of options funds. The announcement comes only a few months after Goldman completed its acquisition of Innovator ETFs, the creators of the first buffer exchange-traded fund, another derivative-driven product. With NEOS, Goldman will oversee just over 220 options ETFs.

“People talk about democratization of alts when they discuss evergreen vehicles that have been created,” said Marc Nachmann, Goldman’s global head of asset and wealth management. “This is another democratization of sophisticated products that large institutions have used for a long, long time that is now available to everybody.” He added that he expects a long-term shift to options strategies among clients. “People want to have income-earning assets in their portfolios,” Nachmann told Advisor Upside. “Structured notes have been around for a long time, so this isn’t a particular moment. It’s a building block in the portfolio.”

Boomer Candy

Options ETFs have proliferated in recent years for several reasons. The US is experiencing a massive retirement wave, with more than 50 million American adults having exited the workforce. Many older clients are looking to generate income while preserving assets. “The demographics have really helped raise the profile of these types of ETFs,” said Zachary Evens, Morningstar analyst.

The ETFs also tend to carry higher fees than passive funds, giving asset managers competing with mega-issuers an opportunity. “Index strategies is a contest that smaller issuers will rarely win, so many went into this options space following investor demand,” Evens told Advisor Upside.

According to Morningstar Direct data:

• Derivative income ETFs have brought in nearly $41 billion in assets so far this year.
• Meanwhile, defined outcome funds have gained roughly $6 billion in the same time.

“We call these types of funds ‘boomer candy,’” said James Seyffart, senior analyst at Bloomberg Intelligence. “They were selling well, even without the Goldman brand name, so it’s probably easier to just acquire at this point than grow your own business.”

Major acquisitions of options-based issuers are still in the early innings, with Goldman leading the charge. However, in May, WisdomTree completed its acquisition of Atlantic House, a London-based active manager specializing in defined outcome and derivatives-driven investment strategies.

There are models everywhere, and we’re not talking about fashion week.

Vanguard on Wednesday announced new customizable model portfolios, which will allow advisors to tweak the firm’s existing strategies and customize them based on client preferences. Advisors can work with one of three selected partners — Vestmark, Orion or SS&C Black Diamond Wealth — to adapt the models to fit values and tax preferences. The move highlights the $13 trillion asset manager’s efforts to keep up with custom momentum: Last year, Goldman Sachs launched its own public-private portfolios, and custom model portfolio assets hit $258 billion in March, a 40% increase year over year, according to recent Morningstar data. The Vanguard offering is the latest option for advisors building custom portfolios for their clients.

“This is just a natural proliferation of everybody’s preference to have more tailored experiences,” said Rob Battista, executive vice president at Vestmark. “Whether people are buying cars or clothes these days, they expect a very tailored experience. And investors and advisors don’t feel any differently about their investments.”

Customized Craze

Initially, Vanguard plans to roll out four model families, according to the firm. Those options include active-passive, dynamic active-passive, fixed-income and income-oriented products.

“The framework for this is, ‘Mr. and Mrs. Advisor, you commit assets to me, we’ll create 10, 20 custom models that no one else sees,’” Battista said, adding that Vanguard helps advisors understand what their needs and preferences are. “Then I have 10 or 20 models that are specific to my practice.”

The target audience is mostly the independent channel, since larger broker-dealers already allow for more customization. The partner firms will act as subadvisors, although the advisor is still the one making the investment decisions, Battista said.

Model Citizens. While it’s still early innings for the trend, there have been major improvements in investment technology that allow for better customization, Battista added.

“What you’re seeing now are asset managers coming in to address some of the pushback on traditional models,” he said, adding that they were more rigid and didn’t consider taxes. “Now asset managers’ solution to that is … ‘We’ll build it together.’”

Negative quarterly earnings could start going the way of a certain 2025 heist movie starring Jesse Eisenberg: Now you see me, now you don’t.

With the SEC’s proposed change to allow companies to report earnings semi-annually rather than quarterly, negative quarterly performance is more likely to get swept under the rug in positive half-year reports. For example, bad quarters where revenue declined by at least 5% would be masked by positive semi-annual reports at twice the rate as good quarters, according to a Bloomberg analysis of S&P 1500 companies’ earnings going back to 2010. With less information about company performance in addition to a possible move toward 24-hour trading, some advisors are gearing up for more market turbulence.

“That would obviously create more volatility with more concerns on transparency and inability to really understand the health of the company,” said Christine Sol, an investment strategist at Signature Estate & Investment Advisors, adding that less company data combined with more trading hours is “quite a disconnect.”

Farsighted or Far-Fetched?

Proponents say semi-annual reporting would ease companies’ bureaucratic burden and let them focus on long-term goals over seasonal performance. On the other hand, critics counter that along with reducing transparency and increasing volatility, it would leave retail investors, who lack the proprietary data available to institutional investors, at a disadvantage. And while volatility is an opportunity for experienced investors to buy low and sell high, it “plays with the strings of the retail investor,” said Gabriel Shahin, founder of Falcon Wealth Planning. “When things are good, it makes them feel invincible … When it’s bad, it’s going to get really bad because retail is going to continue to sell.”

The proposed rule change is drawing wide attention:

• The SEC reportedly collected about 200,000 comments on the plan, the largest public comment docket by volume for an official proposal from the agency.
• The vast majority (we’re talking 99.5%) of those comments were negative, according to research by Tzachi Zach, an accounting professor at the Ohio State University.

Crude Awakening. This blurring effect was especially pronounced in the energy sector during the pandemic, when oil prices were highly volatile. Bloomberg’s analysis found that among current Russell 1000 Energy Index companies, more than half had at least one quarterly revenue move between 2020 and 2021 that would have been masked by semiannual results. This phenomenon could also be prevalent in consumer discretionary goods, which are prone to dramatic seasonal shifts, Sol said. “If we have semiannual reporting, all that is jumbled together. We’re supposed to paint a picture ourselves about what happened over those six months, and it doesn’t really give a clear confidence of where the consumer is going.”