What is SEPZ? (Pros, Cons, and Strategies)

Investing in ETFs is a popular strategy for many seeking stable returns with an element of risk management. One such ETF is the TrueShares Structured Outcome (September) ETF, abbreviated as SEPZ. Similar to other structured outcome ETFs, SEPZ aims to provide investors with a specific investment outcome over a one-year period, such as defined downside protection and capped upside potential. Today, we’ll delve into what SEPZ is, its pros and cons, and some strategies you might consider when investing in it.

What is SEPZ?

SEPZ stands for TrueShares Structured Outcome (September) ETF and is part of the TrueShares Structured Outcome Series. Unlike typical ETFs that invest in a basket of stocks or bonds, SEPZ employs a strategy designed to offer a defined outcome based on the performance of a particular index, often the S&P 500.

SEPZ specifically seeks to provide a buffer against losses while capping the gains an investor can achieve over a set period, typically one year, starting in September.

Key Features of SEPZ

• Defined Outcome Strategy: SEPZ aims to offer a buffer against the first 15% of losses over a one-year period while setting a cap on potential gains.
• Rolling One-Year Outcomes: Each year, SEPZ resets its defined outcome parameters, offering a new opportunity for a specified level of downside protection and potential upside.
• Flexibility for Investors: SEPZ is designed to appeal to risk-averse investors who want exposure to equity markets but also seek some level of downside protection.

SEPZ Composition

SEPZ primarily invests in a set of options on the S&P 500 Index. These options are structured to deliver the targeted buffered outcome by absorbing a portion of the losses and capping the gains. This strategy differentiates SEPZ from traditional ETFs that mainly hold stocks or bonds.

Pros of SEPZ

Downside Protection

One of the standout features of SEPZ is its ability to protect against losses up to a predefined level, usually the first 15%. For investors wary of market downturns but still wanting equity exposure, this provides a significant layer of comfort.

Structured Outcome

SEPZ offers an attractive proposition for investors looking for certainty in their investment outcomes. The defined buffer and cap give a clear expectation of potential risks and rewards, making investment planning more straightforward.

Diversification of Portfolio

Including SEPZ in a diversified portfolio can be an effective hedge against overall market volatility. By potentially reducing the extent of losses during market downturns, SEPZ can help stabilize the performance of your broader investment portfolio.

Cons of SEPZ

Limited Upside Potential

While the downside protection is a significant advantage, it comes at the cost of capping the upside potential. This means that during bull markets, SEPZ may underperform compared to traditional equity ETFs, as gains are restricted once the cap is reached.

Complexity

The structured outcome ETF, like SEPZ, can be more complex to understand compared to traditional ETFs. Investors need to fully grasp how the options strategy works, the implications of rolling periods, and the specific terms of the buffer and cap.

Expense Ratio

SEPZ often has a higher expense ratio compared to simple index-tracking ETFs. The cost of managing the options strategy can add to the annual expense, which may eat into your returns over the long term.

SEPZ Investment Strategies

Given its unique features, SEPZ can be a valuable addition to certain investment strategies, especially for those focused on risk management and income stability.

Long-term Hedging Strategy

SEPZ can serve as a long-term hedge against equity market downturns. By investing in SEPZ, you can cushion your portfolio against significant market losses, thus protecting your capital over the long term. This strategy is particularly beneficial for risk-averse investors who want exposure to equity markets without taking on full downside risk.

Complementary Investment

SEPZ can complement other high-growth investments in your portfolio. Its downside protection allows for a balanced portfolio where the risk from high-growth but volatile investments is offset by SEPZ's buffer structure. This can provide more stable returns over time.

Tactical Allocation

Investors can tactically allocate a portion of their portfolio to SEPZ during periods of expected high market volatility. If you anticipate a market downturn, shifting funds to SEPZ can mitigate losses while still keeping you invested in the equity market.

Regular Rebalancing

Given the structured outcome strategy resets annually, regular rebalancing is crucial. This means reassessing your SEPZ holdings at least once a year, in September, to decide if it aligns with your current investment goals and market outlook.

SEPZ offers a unique investment opportunity combining downside protection with equity market exposure. While it has its limitations, the pros make it a compelling option for investors seeking to manage risk while staying committed to long-term growth. Understanding its structure and potential role in your portfolio can help in making more informed investment decisions.