Hedged Tesla fund promises buffer from wild swings in carmaker

Investors may finally have a way to capture Tesla Inc.’s gains while avoiding the stomach-churning swings the electronic-vehicle stock is known for.

The Innovator Hedged TSLA Strategy ETF (ticker TSLH) is set to launch on the Cboe on Tuesday, and seeks to tap into gains in the carmaker while limiting quarterly losses to 10%. It will invest about 90% of its assets in Treasury bills and 10% in options through a strategy known as call-option spreads, which involves buying in-the-money calls and selling out-of-the-money bullish contracts.

While the fund looks to provide a floor to losses in Tesla, it would also cap positive returns. Under recent market conditions, a strategy similar to the one for TSLH would provide about a 10% quarterly cap on gains, according to estimates by the fund’s issuer, Innovator Capital Management LLC. Since the fund is listing at the end of July, the maximum gain this calendar quarter for people who invest at the launch is estimated to be 8.7%.

“There is no guarantee that the fund will be successful in implementing the strategy,” Innovator warned in a statement. Investors’ returns will also differ depending on the time at which they buy and sell shares of TSLH during each calendar quarter.

Tesla’s stock is down more than 20% this year alongside the bear market in equities, although it’s fared better than some other megacap names such as Alphabet Inc. and automakers like Ford Motor Co. and General Motors Co. A better-than-expected earnings report helped Elon Musk’s company rally in recent days. The stock remains “highly appreciated relative to its peers” with potential to fall, Bruce Bond, chief executive officer of Innovator said in an interview.

“Tesla is going to face competition and we think face some challenges down the road potentially,” he said. “For people that want to really be involved with it, we want them to be able to get involved, but not risk significant loss.”

Tesla’s returns have varied widely in recent quarters. For example, in the fourth quarter of last year, it rose 36%, while in the second of this year, it tumbled 38%.

When Innovator first filed for the fund, it planned to invest 20% of assets in options and 80% in Treasury bills, corresponding with an ability to limit quarterly losses to about 20%. But after speaking with investment advisers, who desired a greater limit on losses, Innovator adjusted the options holdings to 10%, Bond said.

Innovator specializes in defined-outcome products — also known as buffers — which seek to shield against a certain percentage of losses in return for a cap on market upside. TSLH, which carries an annual expense ratio of 0.79%, is Innovator’s first fund that targets a single stock.

In an increasingly saturated ETF industry, issuers are racing to offer a new breed of ETFs that focus on single companies. America’s first leveraged and inverse single-stock ETFs launched earlier this month, with at least 85 more similar funds currently planned.

The leveraged and inverse funds are designed for active traders looking to make magnified bets on stocks on a short-term basis. In contrast, TSLH is meant to reduce risk for “longer term buy-and-hold type investors that are looking to establish a larger position in Tesla,” Bond said.

Other issuers have filed for multiple single-stock ETFs targeting various companies all at once. Innovator, meanwhile, took a slower place by planning just the Tesla-focused fund first.

“We thought Tesla was the most obvious opportunity right now and the greatest need in the market,” Bond said. “But I would imagine that we’ll see how this goes, and if it’s successful, we’ll look to introduce additional ETFs.”

— By Elaine Chen and Katie Greifeld (Bloomberg)