2023-11-29 16:21:28 ET
Summary
- The Neos Enhanced Income Cash Alternative ETF aims to generate enhanced monthly income through a portfolio of T-bills and put spread options.
- CSHI carries risks related to short-term rates and a potential correction in the S&P 500, making it unsuitable for investors looking for cash parking vehicles.
- The fund's options portfolio is at risk due to low volatility, and a black swan event could result in significant losses. Investors should consider alternative funds like BIL or JAAA.
- Complex risk factors layered into ETFs is a nascent trend, with retail investors needing to fully understand what drives returns for a fund.
Thesis
The Neos Enhanced Income Cash Alternative ETF ( CSHI ) is an exchange traded fund. As per its literature, the fund:
aims to generate enhanced monthly income by investing in a portfolio of 1-3 Month T-bills and implementing a data-driven put spread option strategy
While categorized in the ' Ultra-Short Bond Funds ' sector, the vehicle contains a more complex pay-off profile via its put-spreads trades. The fund is built via a portfolio of short dated T-bills which generate a 5% 30-day SEC yield, while at the same time being long the S&P 500 via put spreads.
In this article we are going to analyze in detail the risk factors driving the returns for the fund, stress-test its options portfolio, and show a retail investor why CSHI is not an appropriate cash-parking vehicle in the current environment.
Never, ever buy risk factors which you do not understand
One of the issues with many new funds and products is the complex packaging of risk factors so that the true drivers of performance are not transparent or easy to understand. We are making the case CSHI exhibits the same behavior. As a retail investor, if you own this fund, you are subject to two main risk factors:
- Short Term Rates
- S&P 500 short term correction
Short term rates are well understood and can be obtained via money market funds, treasury funds and certificates of deposit. The second risk factor, namely being long the S&P 500 via put spreads is a more complex topic, but ultimately a retail investor needs to understand that CSHI is NOT akin to a money market fund or short term cash parking vehicle, and can take a severe beating in a 'black swan' type of event. Furthermore the strategy of selling put spreads relies on volatility monetization, and when volatility is low, an investor often does not get properly compensated for the risk taken.
In our view CSHI falls more in the hedge fund strategy space, with another fund we reviewed , namely the Simplify Enhanced Income ETF ( HIGH ) being a more appropriate vehicle to harvest premiums from trading option spreads.
Volatility is at almost three years low
When monetizing volatility and spot via put spreads, the fund is basically selling volatility and delta. Volatility is currently at the second lowest level since January 2020:
The above graph represents the CBOE Volatility Index ( VIX ), which is the main index utilized to measure the S&P 500 volatility. As with any asset class, you want to sell high and buy low. Right now CSHI is selling low.
Volatility usually jumps when the S&P 500 price also moves lower, so both risk factors will move against the fund in a market risk-off event.
What is the impact in a black swan event?
The difference between selling naked puts versus put spreads is the containment of the potential losses. A put spread represents the concurrent selling of a higher strike put, and the buying of a lower strike put, both for the same amount and with the same expiration date. Thus, in a put spread transaction, the maximum loss is represented by the differential in strikes multiplied by the number of contracts sold. Put spreads are thus more conservative than outright naked puts, and have a defined loss profile. The fund currently has a number of put spread relationships:
The fund currently has four put spreads on the books, all with a December 7, 2023 maturity date. The expiry date is thus extremely close, meaning the decay of the options will happen fast, and the probability for a gap-down in the market is low as compared to a long tenor for a put spread.
We can see from the above table a number of strikes for the sold puts, ranging from 4275 to 4090. The sold puts are in blue in the above table, and you can see the negative figures in the 'Shares' category, meaning the fund sold these contracts. With the S&P 500 now at 4540, the highest strike is only -5.8% away from the current S&P 500 level. The lowest strike is at 4090, which is -9.9% away from the index spot levels. The average strike level for the sold puts currently stands at 4198.
Conversely, on the bought put side the strikes vary from 3900 to 4140, with an average strike level of 3998. The lowest strike bought put is 14% away from current spot levels. That translates into the fund suffering a full loss on all of its put spreads if the market falls by 14% or more until the maturity date.
The fund sold and bought 556 contracts on the put spreads, which represents a rough notional of $1.018 billion. The put spread differential is 200, which is 4.8% of the notional. Thus in the most adverse scenario, when the market tanks by 14% or more, the fund can lose -4.8% from its current put spread relationships.
This figure is not catastrophic by any means, but it would completely wipe out the gains for 2023. More importantly though, a retail investor needs to be aware that this fund CAN and WILL lose money in a black swan event when the S&P 500 tanks, versus a pure treasury or money market fund which is going to hold its value in such a scenario.
Performance - is it worth it?
We have now identified the risk factors which sit behind CSHI's performance, analyzed how the vehicle will do in a negative scenario, and looked at the strike levels for its put spread relationships. As a yield enhancer via its options strategy, let us also have a look at how CSHI did versus other true short term funds and an options spreads fund:
On a year to date basis CSHI has outperformed BIL by 127 bps, while trailing HIGH by more than 100 bps. The fund thus straddles the two comparison points in the cohort. However, please note that a pure AAA fund, but one focused on CLOs, namely JAAA, has trounced all of the names in the comparison population. The take-away here is that a retail investor does not need to juice up returns via S&P 500 risk when they can get a high yield from a true asset based fund like the Janus Henderson AAA CLO ( JAAA ).
CSHI's total return profile, in our opinion, does not justify the black swan event type of risk it is taking via its options strategy, with retail investors being able to obtain similar or higher returns from pure cash funds.
Conclusion
CSHI is an exchange traded fund. The vehicle contains a portfolio of short dated T-Bills which generate a 5% yield, and enhances its returns via selling S&P 500 put spreads. The fund has short term rates and the equity index as its main risk factors, and can see its year to date performance completely wiped-out if the S&P 500 falls by -14% or more until the next maturity date for its put spreads.
A retail investor needs to understand CSHI is not a cash-parking vehicle, but a fund which juices up its returns via contained equity risk, and even if the probability of a market crash is low, the risk factor is still present. With volatility at the second lowest level since January 2020, now is not the time to be short vol, and the strike of the closest put spread is only -5.8% away from current spot levels.
We are of the opinion that retail investors looking for true short term cash yields should look at BIL or JAAA, while investors looking to enhance yields via options strategies should take a look at HIGH, which has outperformed CSHI in 2023. We are a sell for CSHI, with a swap into BIL, JAAA or HIGH depending on desired risk factors.
For further details see:
CSHI: Not A Cash Parking Vehicle, Better Alternatives Exist