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De-Risking Your Portfolio Without Giving Up On Strong Returns (Podcast)

Lets Talk ETFs profile picture
Lets Talk ETFs


  • J.D. Gardner started ETF firm Aptus to attack what he terms the "behavior gap" in investing, whereby investors routinely underperform their underlying investments by "performance chasing"
  • Aptus' flagship fund, DRSK, attacks the behavior gap frontally by limiting drawdowns through the use of maturity date bond ETFs and broad index puts.
  • Yet, DRSK has managed to handily beat the S&P 500 in 2020 by taking advantage of the "sporadic asymmetry" offered by buying a basket of stock calls.
  • Gardner joins Let's Talk ETFs to explain the philosophy behind DRSK and why he believes Aptus has cracked the code to tamping down risk without giving up on strong returns.

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By Jonathan Liss

Today's guest is J.D. Gardner. J.D. founded Aptus in 2013 to attack what he has termed the "behavior gap in investing", which leads investors to underperform their underlying investments by chasing past performance. As Brad Barber and Terrance Odean demonstrated in their seminal 2011 paper, The Behavior of Individual Investors:

Individual investors (1) underperform standard benchmarks (e.g., a low cost index fund), (2) sell winning investments while holding losing investments (the “disposition effect”), (3) are heavily influenced by limited attention and past return performance in their purchase decisions, (4) engage in naïve reinforcement learning by repeating past behaviors that coincided with pleasure while avoiding past behaviors that generated pain, and (5) tend to hold undiversified stock portfolios. These behaviors deleteriously affect the financial well being of individual investors.

Gardner founded Aptus to help merge theory with reality. According to Gardner, "An investor’s return is more important than an investment’s return." As such, Aptus' funds are designed to minimize behavioral inefficiencies and enhance outcomes. The firm's flagship Defined Risk Strategy ETF (BATS:DRSK) has gathered nearly half a billion dollars in less than two years by effectively delivering on the Aptus' mandate. In fact, DRSK has outperformed the S&P 500 YTD by more than 500 basis points - and with much lower drawdowns:

DRSK has managed to achieve this via a three-pronged approach:

1) Create a steady and safe income stream by building bond ladders with the majority of the portfolio via Invesco and iShares defined maturity investment grade corporate bond ETFs (NASDAQ:BSCK), (NASDAQ:BSCL), (NYSEARCA:IBDM), (NYSEARCA:IBDN), (NYSEARCA:IBDO), (NYSEARCA:IBDP), (NYSEARCA:IBDQ), (NYSEARCA:LQD)

2) Protect against downside risk by buying puts on the SPX and (NASDAQ:QQQ)

3) Create upside opportunities by taking advantage of the "sporadic asymmetry" offered by a basket of roughly 20 individual stock calls, diversified across sectors

Surprisingly, this conversation had me rethinking my own portfolio's composition for days afterwards. Whether or not you plan to consider buying DRSK, the approach taken by Gardner in constructing DRSK offers important lessons on how careful portfolio construction can help the vast majority of investors improve their own performance - by combating behavioral biases we often fail to see in ourselves.

Show Notes

  • 2:00 - Describe the economic situation in Alabama as a result of the pandemic
  • 3:30 - Work/life balance
  • 5:00 - What made you decide to start your own ETF firm?
  • 7:00 - The behavioral issues facing the majority of investors
  • 11:00 - What is sporadic asymmetry?
  • 12:45 - How does DRSK merge theory with reality?
  • 15:00 - Fund construction: Building a bond ladder with maturity date bond ETFs (BSCK), (BSCL), (IBDM), (IBDN), (IBDO), (IBDP), (IBDQ) vs. just holding broad bond funds like (LQD)?
  • 19:00 - DRSK and duration risk
  • 21:00 - DRSK and credit risk
  • 27:00 - What percent of the overall return of the fund does the 6% in options represent?
  • 30:00 - Is the call buying strategy designed to replicate the broad market in terms of sector allocations?
  • 32:00 - How did you decide on Southwest (LUV) vs. other airlines (UAL) (DAL)?
  • 36:30 - Broad index puts for hedging
  • 39:00 - How did this hedge cushion the blow in the first quarter of 2020?
  • 42:30 - How is the fund treated for tax purposes?
  • 45:00 - Is this ETF meant to be a core holding?

This article was written by

Lets Talk ETFs profile picture
Let’s Talk ETFs is Seeking Alpha's podcast dedicated to the exchange traded fund space. Hosted by Seeking Alpha’s ETF expert, Jonathan Liss, the podcast features long-form conversations with industry insiders, ETF issuers, asset managers and investment advisers to explore the ways in which ETFs continue to evolve, helping investors to reach their financial goals.

Analyst’s Disclosure: I am/we are long DRSK, VOO, QQQE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

J.D. Gardner is long DRSK. Jonathan Liss is long QQQ and VOO.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given that any particular security, portfolio, transaction or investment strategy is suitable for any specific person. The author is not advising you personally concerning the nature, potential, value or suitability of any particular security or other matter. You alone are solely responsible for determining whether any investment, security or strategy, or any product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. The author is an employee of Seeking Alpha. Any views or opinions expressed herein may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank.

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Comments (8)

Lets Talk ETFs profile picture
The transcript of this episode is now live: seekingalpha.com/...

Gordon Gekko Greed profile picture
FYI....QQQM fund has started trading and it mirrors the QQQ. It has a lower share price and expense ratio. It was created for the buy and hold investor.
SA Admin Jonathan Liss profile picture
Yep - the issue there is that you have to pay taxes on crazy amounts of gains if you've been averaging into the QQQ since 2008 in a non-tax deferred account like I have. But I'll certainly make new share purchases in QQQM.
This was an interesting listen thanks for posting. Regarding DRSK, I’m wondering if the buying of near dated calls and expecting some of those to pay off in a 30 day horizon will return much in an extended bear market. The big market draw downs will be mitigated by the offsetting puts but if stocks slide or flatten out for an extended period of doldrums then I can see the DRSK fund suffering very sub par performance as fewer of these calls generate any gains.
Cuip99 profile picture
One passive comment about LQD. Come on guys stop dropping names in the title to encourage reading about other things. If I see LQD in the title I expect to see at least a paragraph on LQD but all I found is a sort of also ran comment in one line with other investments.
SA Admin Jonathan Liss profile picture
My apologies @Cuip99 - I should have made sure LQD appeared in the show notes so you could skip right to the exact relevant section. We discuss in great details (starting around the 15 minute mark) the advantages of building a bond ladder using I-grade maturity date ETFs vs. a broad fund with a duration range like LQD. I highly suggest listening to that 9 minutes or so of the podcast if this interests you - we get into the direct comparison between the bulletshares and ibond funds versus LQD at the 18 minute mark - gonna update the show notes now
Think Long Term profile picture
KNDI is one of the best bargains on the market right now.
RickinMiami profile picture
Definitely in a constant battle against this bad behavior.

Making clear rules to follow helps like asic stop loss on every position. Calendar marking to rebalanced portfolio at least quarterly.
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