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Portfolio > ETFs

Liquid Strategies Introduces Its First ETFs

By Jeff Berman

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Atlanta-based RIA and investment manager Liquid Strategies started trading its first exchange-traded funds on the NYSE Arca, saying investors can use its Overlay Shares ETFs as a way to both yield extra returns on top of their existing portfolios and counter the market volatility we’ve seen in the past couple of years.

The Overlay Shares are managed by Liquid Strategies and provide investors two streams of returns without requiring them to change their underlying investment portfolios, the company said. It’s a strategy the company previously provided only to accredited investors and institutions, but is now accessible to all investors via these new ETFs, which it’s nicknamed “Ovals” for short.

In a recent interview, Liquid Strategies CEO Brad Ball noted that he started developing the overlay strategy as part of his prior company, Perimeter Capital Management, in 2013, introducing a mutual fund in April 2014. Liquid Strategies then became a standalone company in early 2015.

The Overlay Shares ETF suite consists of five index ETFs employing what the company called a “disciplined risk-managed overlay strategy that aims to generate tax efficient income on top of the underlying assets.” The five Ovals provide dual sources of potential return both from their respective index ETF exposure and the portfolio manager’s overlay strategy, it said, adding they can serve as core, standalone investment solutions or as “building blocks for combined asset allocation solutions.”

The five offerings are: Overlay Shares Large Cap Equity ETF (OVL), Overlay Shares Small Cap Equity ETF (OVS), Overlay Shares Foreign Equity ETF (OVF), Overlay Shares Core Bond ETF (OVB) and Overlay Shares Municipal Bond ETF (OVM).

At the website Liquid Strategies set up for the Ovals, it says each one has a “total” expense ratio of 0.75%. There is, however, also an acquired fund fee for each respective strategy’s underlying portfolio. For example, with the large-cap strategy, the management fee is 0.75% plus 0.03% for the acquired fund, which is Vanguard S&P 500 (VOO), for an actual expense ratio total of 0.78%.

Overlay Shares ETFs “quite simply seek to provide investors and advisors alike a simple, cost-effective, and operationally efficient way to get more from their portfolios over a long-term investment horizon,” Ball, who also serves as portfolio manager, said in a statement. “With interest rates near all-time lows, and volatility threatening equity market performance, our ETF Ovals can help investors potentially achieve higher returns without a material change to their risk profile — and do so without changing their asset allocation,” he said.

The company “decided to offer these ETFs now because, one, we believe investors need help achieving their goals and should not be disadvantaged because they are not large institutional investors,” he explained to ThinkAdvisor after the announcement. It also used ETFs instead of mutual funds this time because “we believe the investing public has spoken with their dollars that this is the preferred vehicle,” he said.

Before the ETFs, the company’s one prepackaged solution, the Theta Income Fund, used the same overlay, “embedded and paired on top of an actively managed short-duration fixed income portfolio,” he pointed out. But he said that earlier “strategy alone is not able to capture as significant amount of the core portfolio for an investor which in essence limited the amount of overlay that smaller investors could capture [and,] by having five additional strategies that each have an overlay embedded, investors and advisors now have six different asset classes to choose or combine that can give them a greater amount of overlay exposure.”

Although overlays aren’t commonly used in the industry now, he predicted that, “20 to 30 years from now,” if not sooner, “every investor will be doing overlays on their portfolio.” Because these products are a “little more sophisticated” than other investment offerings, investors are more likely to hire an advisor to deal with them than handle them on their own, he said.

Over time, Liquid Strategies estimates that 300-500 basis points can be added to a portfolio with its overlays, he told ThinkAdvisor ahead of the announcement. The company had been averaging just over 3% growth across its assets under management each year in its five years of operation, he said.

The firm currently has about $500 million in assets under management, up from $493 million at the end of 2018 and $460 million at the end of 2017, it said.

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Jeff Berman

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