This is the second piece in a series focused on strategies that use financial options to “reshape” the expected return distribution of an index such as the S&P 500. In part 1, I provided an overview of registered index-linked annuities (RILAs), which can be thought of as a riskier version of fixed index annuities (FIAs). With a RILA, there is the possibility of a loss, but the potential upside improves.

In part 2, I will explore three potential approaches to implement these options-based strategies:

  1. Do-it-yourself (DIY), where an investor builds the strategy on their own;
  2. Use an ETF; or
  3. Use a RILA.

In Part 3, I will more explicitly contrast floor and buffer approaches and, in part 4 will provide perspective about how options-based strategies can fit within a portfolio framework.

The explicit and implicit costs and potential benefits of the three implementation approaches differ. For example, some advisors and investors are likely to be attracted to the relatively low costs associated with a DIY approach. ETFs simplify implementation but come with fees (around 75 bps). RILAs are less liquid than a DIY or ETF strategy (e.g., have terms that typically last five or more years), but the illiquidity comes with a higher options budget (i.e., greater cap rate). Plus, RILAs can have lower fees than similar ETF strategies (25 bps versus 75 bps).1

A DIY strategy can work, but it’s not clear how many investors or advisors will be interested in directly purchasing options – especially if it’s only for a small piece of a portfolio. ETFs are attractive for an investor who wants to create the respective risk exposure but isn’t interested in buying and selling individual options, despite the fees (something I’ll address more directly in part 4). RILAs are the best approach for investors who are okay with the illiquidity given the increased expected returns associated with the approach, which are higher than both the DIY and ETF options.