Understanding the dividend risk premium from dividend swaps as a unique source of return in the market.
Emphasizing the importance of due diligence and balanced portfolio allocation in evaluating alternative investments.
Utilizing lower volatility strategies like market neutral arbitrage for capturing market inefficiencies in a logical and objective manner.
Deep dives
The Unique Dividend Swap Portfolio: A Deep Dive into Eric Ervin's Expertise
Eric Ervin, president and CEO of RealityShares, discusses their innovative ETF, Divi, which taps into the OTC market to create a diversified portfolio of 1-5 year dividend swaps, historically earning investors a unique return known as the dividend risk premium. Drawing from his experience as an advisor, he shares how evaluating alternatives and creating a mental framework allowed him to allocate up to 50% of client portfolios to these assets.
Building Client Portfolios with Alternative Investments: A Detailed Approach
As an experienced advisor evaluating alternative investments, Eric Ervin delved deep into structuring client portfolios by distinguishing between risk reducers and return enhancers. He sheds light on the need to carefully analyze the leverage, time frame, and market dynamics of each investment to ensure a balanced approach. By emphasizing the importance of due diligence, he highlights the significance of allocating a more meaningful portion to proven strategies.
Navigating Dividend Risk Premiums: Unpacking Market Behavior and Pricing
Examining the concept of dividend risk premium, Eric Ervin clarifies how dividends swaps trade based on future dividend expectations, not just current levels. He explores the reasons behind the persistent premium in the market, attributing it to a supply-demand imbalance created by structured product issuances and the need to hedge risks. Despite shifts in dividend growth expectations and market movements, he emphasizes the fundamental role of understanding market behavior to capitalize on opportunities.
Challenges in Alternative Strategy Evaluation: Balancing Transparency and Complexity
When assessing complex alternative strategies like Divi as an advisor, Eric Ervin stresses the need for detailed due diligence, especially for risk-reducer products. Evaluating factors like leverage usage, market transparency, and risk correlations, he highlights the importance of understanding market dynamics to anticipate potential shifts and capitalize on opportunities. His nuanced approach emphasizes the balance between risk reducers and return enhancers in crafting effective client portfolios.
The Essence of Market Neutral Strategies: Eric Ervin's Inclination Towards Arbitrage
In a concluding reflection, Eric Ervin reveals his affinity for lower volatility strategies like market neutral arbitrage due to their mathematical precision and emphasis on identifying and capturing inefficiencies in the market. Demonstrating a love for arbitrage due to its logical and objective nature, Eric showcases how such strategies align with his analytical and strategic approach towards investments.
In many ways, the topic of conversation for this episode revolves around what ultimately amounts to a fairly vanilla, almost-index like portfolio.
The asset class in question, however, may verge on the exotic for listeners with less fluency in the field of derivatives.
My guest is Eric Ervin, President and CEO of Reality Shares, and he has joined me to discuss their flagship ETF DIVY. I would argue that DIVY is one of the few exposures that fits the definition of both being liquid and alternative. By tapping into the OTC market, Eric and his team build a portfolio of 1-to-5 year dividend swaps, which have historically earned investors a unique return known as the dividend risk premium.
Eric’s confidence to bring such a unique product into the market was borne from his experience as an advisor, where he utilized alternatives extensively with his clientele. Learning more about this experience in evaluating alternatives and the mental framework he used that allowed him to allocate upwards of 50% of client portfolios to alternatives is where we begin our conversation.
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