“What goes up, must come down” was first stated by Sir Isaac Newton to describe his Law of Gravitation. The statement applies equally to both falling fruit as well as fluctuations in the stock market. While our last blog discussed the ability of our covered call fund to participate in the potential market upside Have Your Cake and Eat it Too, in this edition, we will focus on perhaps the most important attribute of option-based funds which is the ability to reduce volatility.
Besides its physics applications, Newton’s quote has many other real-world corollaries, including the markets. A former colleague of mine often said, “Trees don’t grow to the sky,” of course, meaning that stocks cannot go up forever. While the market, as represented by the S&P 500® Index, has returned on average about 10% per year since 1928, the path has been far from straight up. In most years, the market experiences several pullbacks greater than 5%. As a result, many investors have historically allocated less of their portfolios to equities despite the market's long-term return. We believe that an option-based fund can be the answer for investors who are looking for an investment that can reduce downside participation during these pullbacks.
The following chart illustrates the potential benefits of using option-based funds to reduce volatility. The chart compares the performance of the Connors Hedged Equity Fund (CVRDX) versus the S&P 500® since the fund’s inception on January 19, 2022. The Fund is managed to provide a diversified stock portfolio with lower volatility through call writing and the use of puts and put spreads. There have been seven 5% or greater pullbacks since the Fund’s inception. As depicted below, CVRDX experienced significantly less downside than the market during each of the 5%+ pullbacks, averaging approximately 60% of the market downside over the seven pullbacks as shown in the accompanying table.
In summary, while Newton’s law that what goes up must come down is indeed true, with regard to investments, the addition of an options-based fund such as the Connors Hedged Equity Fund (CVRDX) may help cushion the fall by reducing the downside participation.
For Professional Use Only – not to be distributed to the general public
Investors should carefully consider the investment objectives, risks, charges, and expenses of the fund before investing. The prospectus contains this and other information about the fund, and it should be read carefully before investing. Investors may obtain a copy of the prospectus by calling 833-601-2676 or at www.connorsinvestor.com/mutual-funds.The Connors Hedged Equity Fund is distributed by Ultimus Fund Distributors, LLC, Member FINRA/SIPC. Ultimus Fund Distributors, LLC and Connors Investor Services are separate and unaffiliated.
IMPORTANT RISK INFORMATION:
As with any mutual fund investment, there is a risk that you could lose money by investing in the Fund. The success of the Fund's investment strategy depends largely upon the Adviser's skill in selecting securities for purchase and sale by the Fund, and there is no assurance that the Fund will achieve its investment objective. The Fund was formed in 2022 and has no operating history. In addition, although the principals of the Adviser have investment management experience, none have experience managing an open-end mutual fund prior to the Fund.
Investments in options involve risks different from, or possibly greater than, the risks associated with investing directly in the underlying securities. The S&P 500® Index is a capitalization-weighted unmanaged index of 500 widely traded stocks created by Standard & Poor’s. The index is considered to represent the stock market's performance in general. Indexes do not incur fees, and it is not possible to invest directly in an index.
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This commentary is not intended for the giving of investment recommendations to any single investor or group of investors, and no investor should rely upon or make any investment decisions based solely on its contents. All returns are shown net of fees. The indices shown are for informational purposes only and are not reflective of any investment. As it is not possible to invest in the indices, the data shown does not reflect or compare features of an actual investment, such as its objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, or tax features. As it is not possible to invest in an index, the information shown does not reflect the features of an actual investment, such as objective, cost and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, or tax features. The Strategy involves risk, including the possible loss of principal. There is no assurance that the Strategy will achieve its investment objectives. The use of leverage embedded in written options will limit the Strategy's gains because the Strategy may lose more than the option premium received. Selling covered call options will limit the Strategy's gain, if any, on its underlying securities, and the Strategy continues to bear the risk of a decline in the value of its underlying stocks. The S&P 500® Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock's weight in the Index proportionate to its market value. It is widely used as a benchmark of U.S. equity performance. Standard deviation is a statistical measurement of volatility risk based on historical returns.
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