Preparing for Market Shifts with ConvexityShares™

ConvexityShares | September 15, 2023

Timing matters. Active traders know this to their core. Even more strategic, long-term investors recognize the importance of owning some assets that have the potential to zig in times when others zag. The ConvexityShares ETFs, tickers SPKX and SPKY, offer price exposure to equity volatility, providing active traders opportunities to express their market views in a timely manner. SPKX and SPKY also offer strategic allocators tools with low historical correlations to stocks for those times when diversification matters most.

What’s more, given present market conditions it may be a good time to brush up on volatility-related strategies. After all, U.S. stocks have had a good run in 2023, but as the saying goes, all good things eventually come to an end.

The Volatility Trade – It’s About Time

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For illustrative purposes only. Not indicative of an investment in any ConvexityShares Fund. Past performance does not guarantee future results. Candlestick charts display the high, low (stick) open, and closing prices (body) of a security for a specific period. Red represents a negative return for the day. Green represents a positive return.

They say a picture is worth a thousand words, well here are two pictures worth all the words needed to convey the sentiment that nothing lasts forever, and it’s likely only a matter of time before equity volatility returns. The first chart (above) is a daily price chart of the SPDR® S&P 500® ETF (SPY).¹ 2023 has been a good year for stocks. However, prices peaked in July and have been struggling to trade above the 50-day simple moving average.²

The second chart (below) shows the SPIKES® Volatility Index³ recently retesting and advancing off the June and July lows. Note that the SPIKES Volatility Index spent most of August above the 50-day moving average and is currently back above the average.

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For illustrative purposes only. Not indicative of an investment in any ConvexityShares Fund. Past performance does not guarantee future results. It is not possible to invest directly in an index. Candlestick charts display the high, low (stick) open, and closing prices (body) of a security for a specific period. Red represents a negative return for the day. Green represents a positive return.

A Boiling Pot - The Bigger Picture

The world is becoming more fragmented. The COVID-19 pandemic unveiled significant supply chain vulnerabilities, and countries around the world are rethinking their dependence on foreign production. What’s more, geopolitical tensions are on the rise. Unsettled differences among global leaders has resulted in economic sanctions, tariffs, and war. The resulting financial impacts are showing up in currency, sovereign debt and commodity markets alike. While U.S. equity markets have performed well recently, it may only be a matter of time before the reverberations of international conflicts manifest in renewed stock market volatility.

Keep in mind that the U.S. stock market, as well as the U.S. economy has largely benefited from a record injection of capital tied to the COVID-19 response. Increases in money supply help to support asset prices such as real estate and, yes, stocks.

Presently the Federal Reserve has adopted a higher for longer interest rate policy and is focused on reducing the money supply. As such financial conditions are tightening and recession risks are rising. This suggests that it is only a matter of time before stocks experience renewed volatility.

The good news is that tactical traders, and strategic allocators have viable investment solutions available to them, that can help weather stock market volatility.

SPIKES Volatility Index – The Competitive Edge

ETF investors have options when considering volatility ETFs. It’s a competitive marketplace and competition is good. Setting us apart from all other volatility ETFs, is the fact that our funds invest in SPIKES Volatility Index futures contracts.

The SPIKES Volatility Index, commonly referred to as SPIKES (ticker: SPIKE), gauges the anticipated 30-day volatility related to the SPDR® S&P 500® ETF (SPY). Its calculations are derived from live options prices connected to SPY, reflecting the market's expectations for the upcoming 30-day price movements of SPY. Consistent with established trading standards, SPIKES uses the variance swap methodology, employing real-time options prices to determine volatility.

Furthermore, SPIKES integrates critical adjustments, such as its "price dragging" mechanism. Designed to stabilize the index during volatile periods or limited market liquidity, this strategy considers the nuances of option quotes. Given that market makers frequently provide aggregate quotes, which can deviate from standard supply-demand dynamics, SPIKES's method effectively moderates such volatility. It emphasizes widely-traded SPY options rather than individual S&P 500 index options, ensuring it remains attuned to the predominantly electronic options environment.

Since direct investment in an index isn't feasible, ConvexityShares ETFs invest in futures contracts on the SPIKE Index and are benchmarked to the SPIKES Front 2 Futures Index (“SPKF Index”).⁴ The SPKF Index gauges the return from a daily rolling long position in the SPIKES futures contracts traded on MGEX™ (Minneapolis Grain Exchange). SPKF Index incorporates the first and second contract months and has a daily roll process to uphold an average duration of one month. Generally, the foremost segment of a futures curve is most reactive to the price changes of the foundational asset. Hence, an uptick in equity volatility would be mirrored in the ConvexityShares ETFs' prices.

Final Thought

No one knows for certain when market conditions will change resulting in higher volatility. However, we believe that it is only a matter of time until volatility returns to US equity markets. The good news for investors is that there are choices among volatility ETFs, and the ConvexityShares funds, SPKX and SPKY are two viable solution available for purchase via traditional brokerage accounts.

Learn more about the ConvexityShare ETFs at www.convexityshares.com and be sure to follow along with us on X @ConvexityShares, LinkedIn @linkedin.com/company/convexityshares, and subscribe to our newsletter on our website www.convexityshares.com

¹The SPDR S&P 500 ETF Trust, commonly referred to as the SPY ETF (Exchange Traded Fund), is a prominent entity in the investment fund arena. It tracks the S&P 500 Index, a benchmark that aggregates 500 leading U.S. equities selected based on their market capitalization, liquidity, and sector classification. The SPY ETF was established in January 1993. Learn more here: https://www.investopedia.com/articles/investing/122215/spy-spdr-sp-500-trust-etf.asp

²Simple moving averages calculate the average of a range of prices by the number of periods within that range.

³The SPIKES Volatility Index (SPIKE) is a measure of the expected 30-day volatility in the SPDR® S&P 500® ETF (SPY). It is not possible to invest directly in an index. For more information please visit: https://www.miaxglobal.com/markets/proprietary-products/spikes-volatility/overview

⁴The Funds are benchmarked to the T3 SPIKE Front 2 Futures Index and are not benchmarked to the SPIKES Index. The T3 SPIKE Front 2 Futures the SPIKES Index are two separate indexes and can be expected to perform differently.

BACK TO NEWS & INSIGHTS

Important Information

An investor should only consider an investment in a Fund if he or she understands the consequences of seeking exposure to SPIKES futures contracts. The Funds are benchmarked to the T3 SPIKE Front 2 Futures Index (the “SPIKES Futures Short-Term Index”); the Funds are not benchmarked to the SPIKES Volatility Index.

The use of leverage present significant risks not applicable to other types of funds and may be illiquid and/or highly volatile. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. The funds are not suitable for all investors and should only consider an investment in the funds if he or she understands the consequences of seeking daily leveraged results and the impact of compounding and who intends to actively monitor their investments.

The SPIKES Futures Short-Term Index consists of short-term SPIKES Futures contracts. As such, the performance of the Index can be expected to be very different from the actual volatility of SPY or the performance of the SPIKES Volatility Index. As a result, the performance of the Funds also can be expected to be very different from the actual volatility of SPY or the performance of the SPIKES Volatility Index, or the performance of one-and-a-half times (1.5x) of the actual volatility of SPY or the performance of one-and-a-half times (1.5x) the SPIKES Volatility Index. Nonetheless, the Index and the Funds would be expected to underperform in less volatile markets than in more volatile markets. If the Index declines by more than 66.67% on a given trading day, the Leveraged Fund’s investors would lose all of their money. This would be the case with any such single day movements in the Index, even if the Index maintains a level greater than zero at all times.

Unlike certain other asset classes that, in general, have historically increased in price over long periods of time, the volatility of SPY as measured by the SPIKES Volatility Index has historically reverted to a long-term average level over time. This means that the potential upside of an investment in a Fund may be limited. In addition, gains, if any, may be subject to significant and unexpected reversals. Investors holding Shares of the Funds beyond short-term periods have an increased risk of losing all or a substantial portion of their investment. The Funds generally are intended to be used only for short-term investment horizons. Shareholders who invest in the Funds should actively manage and monitor their investments, as frequently as daily.

In the event that the MGEX (Minneapolis Grain Exchange) Order is deemed unlawful, the SPIKES futures contracts could be deemed to be “securities” and fall within the definition under the Investment Company Act of 1940.

Futures may be affected by Backwardation: a market condition in which a futures price is lower in the distant delivery months than in the near delivery months. As a result, the fund may benefit because it would be selling more expensive contracts and buying less expensive ones on an ongoing basis; and Contango: A condition in which distant delivery prices for futures exceeds spot prices, often due to costs of storing and inuring the underlying commodity. Opposite of backwardation. As a result, the Fund’s total return may be lower than might otherwise be the case because it would be selling less expensive contracts and buying more expensive ones.

Daily compounding of the Leveraged Fund’s investment returns can dramatically and adversely affect its long-term performance, especially during periods of high volatility. Volatility has a negative impact on a Fund’s performance and may be at least as important to the Fund’s return for a period as the return of the Fund’s underlying Index. An investor in any of the funds could potentially lose the full principal value of his/her investment within a single day.

Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. For a prospectus with this and other information about the Fund, please use the contact form at https://www.convexityshares.com/contact-us or download a prospectus by clicking here. Read the prospectus carefully before investing.

Foreside Fund Services, LLC is the Distributor to the ConvexityShares SPIKES Futures ETFs.