Want to profit from Tesla stock — but don't have the stomach for the S&P 500 stock's gut-wrenching volatility? There will soon be an ETF for that.
Innovator ETFs filed plans for a new ETF built for investors who love Tesla stock's upside, but hate its wild sell-offs. The Innovator Hedged Tesla ETF plans to curtail the swings of Tesla stock by using an options strategy, says a filing this week with the Securities and Exchange Commission.
Think of it as a seatbelt for your Tesla stock. And some investors likely wish such an ETF existed already.
Tesla stock has lost more than a quarter of its value from its Nov. 4, 2021 52-week high. That translates into a staggering $338 billion loss, which is larger than the entire market value of 482 stocks, individually, in the S&P 500. It's also burning ARK Invest's Cathie Wood.
'Seatbelt' For S&P 500 Wild Stock: Tesla
It's hard for many to part with Tesla stock outright. Shares of Tesla are up more than 2,500% in five years. That makes it the No. 4 stock in the S&P 500 in that time. It's a millionaire maker.
But that's exactly the hole this ETF aims to fill.
Effectively, owning this ETF allows investors to capture a portion of Tesla stock's upside. Roughly 20% of the fund's assets will own options tied to Tesla's stock. But the remaining 80% will hold Treasury bills.
The options portion of the ETF will use call-options spreads to allow it to capture a portion of Tesla's gains, up to a limit. Meanwhile, the options will curtail downside risk, as will the allocation to Treasuries. The options are to be recalibrated quarterly.
What's this strategy mean for investors? The ETF aims to limit losses on Tesla stock to roughly 20%. And in exchange for buffering the downside, the typical limit to the upside is 22.2% per quarter.
Such a strategy is potentially appealing this year. Shares of Tesla are already down nearly 16% in 2022 so far. That's more than double the 6% drop by the S&P 500.
Looking For Safety In The S&P 500
The S&P 500's violent rotation into value stocks and away from growth is prompting some investors to tweak their strategies. It's also calling into question if big stock winners from the ongoing bull cycle will continue their runs.
Already this year, the SPDR Portfolio S&P 500 Growth ETF fell into a correction as it's off more than 10%. Meanwhile, the SPDR S&P 500 Value ETF is down just 1.3%. Additionally, likely hikes to short-term interest rates may curb returns from bonds, normally a place for investors to hide.
Offering potential upside while curtailing downside is a niche Innovator is carving out with its ETFs. It offers a host of Buffer ETFs that exchange a portion of upside in the S&P 500 for softening the blow of crashes. The Innovator Buffer ETF, for instance, buffers downside by up to 9%, in exchange for capping upside. Such strategies have already lured more than $6 billion in assets.
It's unclear if Tesla stock investors will be willing to give up the S&P 500 stock's upside. But lately, they'd love it if someone would take some of the losses off their hands.
Tesla Joins Top S&P 500 Stocks Suffering
Tesla is just one of the top stocks the past five years to drop from its highs
| Company | Symbol | Stock 5-year % ch. | % stock from closing high* | Sector |
|---|---|---|---|---|
| Advanced Micro Devices | 5,699.5% | -27.0% | Information Technology | |
| Enphase Energy | 5,653.7% | -52.9% | Information Technology | |
| Nvidia | 3,296.9% | -30.9% | Information Technology | |
| Tesla | 2,468.4% | -28.3% | Consumer Discretionary | |
| Etsy | 1,634.4% | -58.7% | Consumer Discretionary | |
| Fortinet | 1025.2% | -20.1% | Information Technology | |
| Paycom Software | 939.6% | -43.7% | Information Technology | |
| Generac Holdings | 869.5% | -47.5% | Industrials | |
| ServiceNow | 845.8% | -20.7% | Information Technology | |
| Old Dominion Freight Line | 787.3% | -12.3% | Industrials |
Sources: IBD, S&P Global Market Intelligence, * — in 52 weeks
Follow Matt Krantz on Twitter @mattkrantz
