This ETF's focus on total return has made it a rare winner over the past year. Here's how it works

Published Tue, Oct 11 20222:27 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

Slow and steady is not always in fashion on Wall Street, but one ETF's strategy for consistent returns has protected its investors during a volatile market and attracted big inflows this year. The Core Alternative ETF (CCOR) is one of the few large funds on the market that has performed well over the past 12 months without focusing solely on energy or inverse bets. "Our goal is to have positive absolute returns regardless of the direction of the market," said Daniel Gamache, executive director at Core Alternative Capital. The fund has a portfolio of individual stocks that is offset by put options on the S & P 500. It has delivered a total return of more than 3% over the past year, according to FactSet, even as equity markets have fallen into a bear market. For 2022, it has fallen less than 1% and brought in more than $250 million of fund flows, according to FactSet. "We use the puts to be our driver of returns through down markets and through volatile sideways or choppy markets, while the equities are obviously the driver of returns in bull markets," Gamache said. The put options used by the fund are derivatives that give the holder the right sell an underlying asset at a set price, and the options have a skewed payoff profile that helps this portfolio work. If the market rises, and the put option isn't used, the holder doesn't lose any money beyond the fee paid to purchase the option in the first place. That certainly is a drag on a portfolio in a bull market, but not enough to sink a fund if the equity side is performing well. However, if the market declines sharply, the put option can make the holder a big winner. Gamache said the put projections are adjusted often — sometimes even daily — to keep the strike price close to the index and capture almost all of the potential profit from a market decline. On the long side, the firm looks for "dividend-growth style, quality biased companies," Gamache said, but he stressed that investors should not look at the fund as a low-beta equity fund. Its top holdings include energy giants Exxon Mobil and Chevron , as well as Eli Lilly . The fund has about $500 million in net assets and an expense ratio of 1.07%. To be sure, the fund's focus on total return and downside protection will likely lead to underperformance of the S & P 500 during up markets. In these periods, the fund has underperformed the S & P 500 going back to its inception in 2017. Gamache said that some clients view the fund as a piece of their equity portfolio while others see it in part as fixed income proxy, given its total return and downside protection focus.