Host: Now to look at our ETF spotlight and this week we are diving into Jets, the US Global Jets ETF. Now this is a fund that is a look at the travel industry. While Jets gives investors exposure to the global airline industry, its biggest positions are some of the largest American carriers including Southwest, United, American, and Delta, which, as we mentioned, is set to report earnings on Friday before the bell. So this ETF is an interesting. Read on two very different forces hitting airlines right now. Demand for travel, which of course is the consumer, and as we were mentioning a moment ago, the cost of fuel. Now Delta's results on Friday should give investors a fresh look at both, including whether consumers are still willing to spend time on travel or spend money on travel, excuse me, and how higher energy costs are flowing through airline margins. So we're going to be watching jets to see which side of that equation. Wins it's going to be resilient travel demand or those rising cost pressures. Let's chat now with Jeff Schwarte, chief equity strategist at Simplify. Jeff, great to have you here with us. So let's just dive right in into these defined outcome strategies. It seems like just broadly owning the market isn't really cutting it anymore. So why are we seeing so much demand for these defined outcome strategies now?
Jeff: Well, good morning, Kristen, and thank you for the opportunity. I think the reason investors are gravitating towards more defined outcomes is because they want more certainty. If using derivatives allow more certainty around income or protection or participation, that's where the evolution of the industry has led to uh using derivatives and ETFs. And as a thirty-year veteran of stock picking, that world is more difficult because you have uncertainty around earnings and multiples and just very difficult to stock pick, as you talked about earlier in the programming. You know, the market's been led by a handful of stocks. So what we're doing at Simplify is giving you higher income-oriented solutions and alternatives which allow investors to create more certainty around outcomes.
Host: All right, Laura, let's chat for a second about auto callables. It's almost like a very new, interesting, and hot product, but I think that a lot of investors still don't understand it. So just really quickly, what exactly is an auto callable and how does the investor actually get paid through that strategy?
Jeff: Yeah, so auto callables is a, is a, is a feature of a derivative contract called a barrier option, and structured notes have been around for a very, very long time. It's a multi-trillion dollar industry. At Simplify, we're the first to bring an auto call ETF to market. Really, what you're gaining is two elements that advisors really seek. They want income, so we're paying a monthly income stream to an investor, and then you got an element of a buffer fund with protection. So think covered calls plus a buffer fund coming together in a single solution. And the way they work is you get a monthly income stream, and then there's a corridor of protection in the event the market sells off, as long as you don't break the barrier of say down 30%, you do not participate in NAV erosion. So really cool features. I, I, I feel like it's kind of an eighth wonder of the world where you get income and protection all in a single ticker symbol.
Host: Now as you mentioned, simplify has a pretty robust suite. So if I wanted income, but I wanted some protection from the volatility, how am I going to decide between the covered calls, buffered equity, the auto callables, which direction should I really be looking in and when?
Jeff: Yeah, I, I feel like if you, if you want protection, obviously, there's, there's hedge equity strategies out there. We have one called uh HEQT. If you want more income, we have a, a product called SPOC SPUC which gives you about a 14% distribution rate. And if you want both of them together, SBAR is our preferred kind of core allocation equity plus or equity income plus protection in a single ticker. So a ticker symbols SBAR. Every single position is a 30% barrier. We've realized about a 9.8% volatility with a 12% annualized distribution rate. XV a little more aggressive on the income side at 15%, and the barrier level will, will vary depending on that income goal of 15%. So right now we're at 22.5%. So you're looking at three different indices to see if you break the barrier at the expiration of the contract, which is typically a one month period. So, I think the first objective is to figure out what the client's most interested. Do they want protection? Then you go to the hedge equity route. If they want income, then you maybe cover calls with a SPUC strategy, SPUC, or if you want both, SBA is an easy solution. And that's the goal of Simplify is democratize access to these types of outcomes. We were the first to come to market and structure notes is a really big industry, and we made it available for everyday investors where there's no account minimums and you enjoy that monthly distribution.
Host: So let me ask you this, Jeff. I'm curious to know what's the sweet spot, particularly for the auto callable strategy, right? Is it a sideways market, a slowly rising market, just a market, you know, where the underlying is trying to avoid a major drawdown?
Jeff: Yeah, so to get the maximum amount of distribution rate, you need a couple of things. We need equity volatility. So the last, since we launched mid-April last year, we had the tariff tantrum, we had the Iran war. That's creating a lot of volatility, which creates a higher income from the, from the option contracts. And directionally we want markets to go up because the feature of auto call says if after a certain period, an on-call period, if all three equity indices are above the initial value, That option contract gets called, which means you can, you can write another option contract after, after that non-call period. And so, since the inception of the strategy, we've had about an average holding period of 92 days, which means 4 times a year we're stacking option premium, and that gives the investors more income. So you need um low correlations, high equity volatility. And that's how you will get the best case scenario. Now, worst case scenario where you'd have to have every single maturity in the portfolio break the barrier at expiration. We diversified the barrier options. We have over 40, 40 individual positions, so we've diversified the exposures on the maturity dates. And again, it's a, it's a really powerful. Solution for investors. A lot of investors have used it via, you know, a direct structure note, but now we're putting in a liquid form. So you don't have the illiquid natures of an annuity or an actual structure note. You get continuous liquidity that an ETF wrapper offers.
Host: All right, Jeff Schwarte, chief equity strategist at Simplify, thank you so much for joining us.
