Credit risk

Simplify launches 2 bond ETFs focused on hedging credit risk

Simplify Asset Management today launched two new strategies offering exposure to diversified investment grade bonds and high yield corporate debt with unique credit hedges.

the Simplify Aggregate Bond PLUS Credit Hedge ETF (AGGH) and the Simplify High Yield PLUS Credit Hedge ETF (CDX) began trading on the NYSE on February 15. AGGH and CDX have expense ratios of 29 basis points and 50 basis points, respectively.

“In volatile markets, during times of financial stress, credit spreads can often widen without notice, which has a very detrimental effect on the performance of an investor’s fixed income portfolio. Hedging against such credit risk can be complicated and costly, two issues we sought to address with the launch of AGGH and CDX,” Paul Kim, CEO and co-founder of Simplify, said in a statement. “With these ETFs, investors now have an approach that allows them to construct a core fixed income portfolio, capturing both the investment-grade and high-yield universes, while also incorporating sophisticated credit hedging to help protect against sudden shifts in credit spreads.”

AGGH is the first ETF to provide investment grade bond exposure with layered credit coverage. The fund’s core bond exposure will be provided through the low-cost and highly liquid market iShares Core US Aggregate Bond ETF (AGG) with credit hedge coverage consisting of a combination of CDX calls, adverse quality factor hedges or SPX put options, opportunistically selected by the Simplify team, according to a company statement .

CDX is the first ETF to provide exposure to high yield bonds with a credit hedge overlay, with hedges selected opportunistically from CDX calls, adverse quality factor hedges or SPX put options. The primary underlying exposure to high yield bonds will also be provided through low-cost, liquid ETFs such as the iShares Broad High Yield ETF (USHY) and the VanEck Fallen Angel High Yield ETF (ANGL)depending on the firm.

“The credit risk premium can be an attractive source of return with the potential to generate significant revenue,” Kim said in a statement. “But credit spreads can turn quickly, making it essential that investors have easy access to credit hedging techniques. We are very pleased to bring these funds to market as we continue to develop some of the most robust suites of tools in the industry for investors looking to protect against key risks, access opportunities with convexity and build portfolios positioned for the uncertain markets of the future.”

AGGH and CDX are part of a range of Simplify ETFs that crossed the $1 billion mark at the end of 2021 and now includes three fixed income funds, joining the Simplify Risk Parity Cash ETF (TYA).

Last month, the company launched a trio of new funds — the Simplify Emerging Markets Equity PLUS Downside Convexity ETF (EMGD)the Simplify US Small Cap PLUS Downside Convexity ETF (RTYD)and the Simplify Developed Ex-US PLUS Downside Convexity ETF (EAFD)each with a built-in downside convexity option overlay designed to limit each fund’s losses.

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