by Tom Doan
In the Snider Investment Method, positions are typically composed of various individual stocks to generate portfolio income. However, in smaller accounts, Lattco may generate Exchange Traded Funds (ETFs) instead of individual stocks. ETFs are generated in smaller accounts because this helps diversify the portfolio and reduce company specific risk, which is at its greatest when an account only has one or two positions. But what are ETFs and how do they work? Read on to find out.
ETFs are securities that trade similar to stocks. However, each ETF represents a basket of stocks rather than an individual stock. An authorized participant will gather shares of each company that make up the ETF and send the shares to a custodian to safeguard. In exchange, the custodian will check the shares and make sure all of the components are in place, after which shares of the ETFs will be sent to the authorized participant. From there, the shares can be sold into the open market and traded like normal stocks. Since the ETF represents multiple stocks, if a company were to go bankrupt, the value of the ETF would not be impacted as much as the individual stock itself. This decreases company specific risk in exchange for lower volatility. As a result, ETFs generally will have lower option premiums.
Although the option premiums for option writers can be expected to be lower than with individual stocks, some investors may be more risk averse and would be willing to sacrifice volatility for a greater peace of mind. Recently at Snider Advisors we introduced managed ETF portfolios. This strategy exclusively utilizes ETFs in the Snider Investment Method instead of individual stocks. You can learn more about our SIM ETF Portfolio HERE. Currently this strategy is limited only to asset management clients. If you would like more information on a managed ETF portfolio or would like to get started, please feel free to contact us at email@example.com or 214-220-0055.