(Bloomberg) - Looking to tap into Tesla Inc. gains while avoiding its white-knuckle volatility? A planned exchange-traded fund wants to do precisely that, just as the Elon Musk-loving retail mob gets tested in the tech market turmoil.
The Innovator Hedged Tesla ETF (ticker TSLH) will invest 20% of its assets in options tied to the electric-vehicle maker, while the bulk of the rest will be in Treasury bills, according to a Monday filing with the U.S. Securities and Exchange Commission.
The strategy seeks to “provide risk-managed investment exposure” through a derivatives strategy known as call-option spreads, according to the filing from Illinois-based Innovator ETFs. The fund will buy in-the-money calls while selling bullish contracts with a different strike price -- meaning it can participate in any Tesla gains, but only up to a limit.
Meanwhile the hefty allocation to Treasury bills is designed to limit “significant losses” in one of the stock market’s highest-fliers. Tesla has famously outperformed the S&P 500 by roughly 15,500% over the past decade, largely fueled by its first-mover advantage in the EV industry and seemingly endless optimism for the company’s growth trajectory.
But with those gains come hair-raising gyrations: While Tesla jumped 50% last year -- handily beating a 27% climb by the S&P 500 Index -- the rally saw drawdowns of as much as 36%, Bloomberg data show. Now the new year backlash against expensive-looking growth stocks has spurred a 12% decline in the car maker versus a 6% drop in the broader market.
While Innovator’s fund would buffer against such plunges, the protection imposes an opportunity cost. If shares rally beyond the strike price on the sold call options, the ETF will underperform Tesla, according to the filing. Potential upside has historically ranged between 13.6% to 33.2% per quarter over the past five years, with an average limit of roughly 22.2%.
The fund will re-initiate positions every three months and its managers may buy and sell call spreads “opportunistically, in their discretion,” it said.
If approved, the ETF will trade on the New York Stock Exchange. The management fee is not yet listed.
Innovator ETFs has carved out a niche in defined-outcome products, also known as buffers, which seek to shield against a certain percentage of losses in return for a cap on market upside.
By Katie Greifeld
