The term “Overlay” has been used in multiple ways across the investment management industry. When we think of an overlay, we envision a fully-invested portfolio with an independent options-based strategy that sits on top of the portfolio designed to increase total return potential. Investors that utilize overlays generally do so with the goal of reshaping potential investment outcomes with the most common goals being:
- Generating additional portfolio income/total return
- Increasing portfolio flexibility
- Reducing risk or volatility of the existing portfolio
Overlays are attractive to investors not only because they can help create more desired investment outcomes, but they are also highly capital efficient. Once the overlay is properly designed and implemented, the total return for the investor becomes the returns of the underlying holdings plus the returns of the overlay. In other words, two return streams from one investment. Importantly, implementing an overlay does not require asset allocation changes to the existing portfolio.
For investors looking to go beyond index exposure or that have experienced little value in actively managed strategies, overlays could be a nice addition. Overlays have been used for years by ultra-high net worth investors along with large sophisticated institutions such as pension plans, sovereign wealth funds and endowments. Many investors have not been able to access these strategies in the past, however Liquid Strategies is working with advisors and their clients to fill this void through the Overlay Shares suite of ETFs. The ETF suite offers multiple solutions across asset classes that provide access to conservative overlay strategies in a very simple way, democratizing a valuable strategy previously reserved for the largest investors. Ovals can serve as core, standalone investment solutions, or as building blocks for combined asset allocation.
Liquid Strategies is happy to serve as a resource to help advisors and investors navigate the various overlay approaches available in the marketplace and would enjoy discussing how Overlay Shares can unlock the full potential of a portfolio.
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The assertions and statements in this blog post are based on the opinions of the author and Liquid Strategies. The examples cited in this paper are based on hypothetical situations and should only be considered as examples of potential trading strategies. They do not take into consideration the impact that certain economic or market factors have on the decision making process. Past performance is no indication of future results. Inherent in any investment is the potential for loss. Options involve risk and are not suitable for all investors. Please see the following options disclosure document (ODD) for more information on the characteristics and risks of exchange traded options.
