Traditional portfolios are already feeling the effects of persistent inflation and rising rates, but an outsized fiscal deficit is the real hurdle advisors and investors should be looking towards. JD Gardner, CFA, CMT, Founder and Chief Investment Officer at Aptus, sat down with ETF.com's Sumit Roy while at the ETF Oasis at Future Proof in September to talk the bond pain points and why options-based strategies offer a more modernized toolkit for portfolios. The following is a transcript of their conversation.
Modern Solutions for Modern Problems
Sumit Roy:JD, how are you doing?
JD Gardner:Doing good. Glad to be here. Feels awesome out here.
Sumit Roy:Absolutely, the weather is beautiful. Now, you are the Founder of Aptus as well as the CEO. You've been at this for a long time, 13 years almost. What is Aptus? What's the philosophy behind the company?
JD Gardner:Yeah, Aptus really exists, we create strategies and solutions to try to help reduce the amount of fixed income exposure that most investors hold. So we've built a business around servicing financial advisors, where we help make portfolio impact, and then we help more formalize an investment process and help them run a better process: research, diligence, all of those things. So that's, in a nutshell, what we do.
Sumit Roy:Speaking of fixed income, you said something that really struck me: you think investors might be over‑allocated to fixed income, and that the real returns from fixed income might not be what investors think they are going forward. Can you talk a little bit about that?
JD Gardner:Yeah. I think this business, one of the things that stuck out when we first started is everybody is 60/40, some version of that. I think the assumptions are really that your bond allocation will protect equities and will produce real returns. We would argue that those are both flawed assumptions.
One simple question I always ask is: would you allocate to anything if it can't protect your purchasing power? Most investors would say no. But you look out and there's 40‑plus percent of every advisory portfolio we see that's in bonds. So our whole objective is to say, can we lighten the load in bonds, which we think are going to struggle to protect equities and produce real returns, and can we let you hold more risk assets? The only way we can do that successfully, in a digestible way, is more stocks, less bonds. But risk has to be neutral, and the risk we've referred to is drawdown risk. So our whole suite of strategies and solutions is designed to do just that.
Sumit Roy:And is what's going on in the bond market right now kind of highlights what you're talking about. We're seeing bonds continue to sell off, the ten‑year around 5%, the 30‑year hitting multi‑decade highs as well.
JD Gardner:Yeah. If you look at five, ten, and fifteen‑year bond returns, the whole wealth management business was built on the period of 17% rates going to zero. That's kind of the birth of the 60/40, because it was really easy to compound capital in both stocks and bonds. And now real after‑tax returns are negative across the five, ten, and fifteen‑year time frames.
A simple thing we always say is people point to CPI as the hurdle rate for bonds. I have a lot of issues with CPI, but if we're running 7% fiscal deficits as a country, that seems like a much better hurdle rate than some stated CPI rate.
Sumit Roy:Right. So what is the solution to this? Is it derivatives‑based ETFs, buffer ETFs and things like that?
JD Gardner:Yeah, I think there's going to be kind of a standing bid for options‑based strategies. So harnessing volatility in ways to enhance portfolio allocations. Our definition of enhancing an allocation is: can we own more of the risk asset, less of the quote‑unquote conservative asset? Options‑based strategies will continue to be innovative in the space and continue to attract advisors. Tons of the flow we see is going to options‑based strategies. And I would say buffers are probably the easiest to digest, because they're super simple and structured. I think you've seen a huge expansion of that market.
Sumit Roy:Right. And we have seen an explosion of these types of products on the market, from Aptus as well as others. How should advisors and investors differentiate between all these products? What makes Aptus ETFs the best bet out there?
JD Gardner:Yeah. Not talking about buffers, just the options‑based stuff in general: I think our approach to options, how active we are, how we monetize, how we redeploy, there's a lot of detail to talk about there. On the buffers, there's more simplicity in that structure. Number one, our fees are lower. And then how we structure the options: if I gave you option A, a 15% buffer with a 15% cap, and option B, a 15% buffer with a 17% cap, it's a clear answer. Our options knowledge has allowed us to come in and lower the price point for shareholders of these buffer funds and improve caps, which ultimately is what matters.
Sumit Roy:Fantastic, JD. Ton of great information. Thanks so much for your time.
JD Gardner:Thank you. I appreciate the questions.
For details about Aptus's funds, please visit aptusetfs.com .
Want more on Aptus and the potential of options in your portfolio? See more from Aptus at the ETF Oasis here .
