Thanumporn Thongkongkaew
Thesis
The ClearShares Extremely-Quick Maturity ETF (NYSEARCA:OPER) is an trade traded fund that falls within the ‘money parking automobiles’ class. The fund is actively managed, and it seeks to generate present earnings by investing its money in repurchase agreements collateralized by U.S. Treasuries and U.S. Authorities backed Securities. This set-up is very uncommon since retail buyers are used to funds that buy Treasuries or T-Payments and cross the return of the underlying collateral to fundholders. Not right here. In impact, one of the best ways to consider OPER is as a lender within the institutional market, the place the fund acts by some means as a ‘mini-bank’ and lends buyers’ money towards extraordinarily protected securities equivalent to Treasuries and Company MBSs.
The distinction between a standard cash-parking ETF that holds T-Payments or Notes versus OPER is the power to seize idiosyncrasies within the funding markets. Technically brief time period Repo charges are very a lot correlated to Fed Funds and the brief finish of the curve, however liquidity crunches can, and have occurred. For instance, in September 2019, the repo charge briefly spiked to 10% on account of a mixture of things, together with company tax funds and new Treasury debt issuance:
SOFR vs Fed Funds (The Fed)
On the identical time, the yield on Treasury payments was round 2%. Which means buyers had been keen to lend cash at the next rate of interest within the repo market than they had been to purchase Treasury payments.
As a visible illustration, an investor ought to deal with the Secured In a single day Financing Fee (SOFR) within the graph above. SOFR relies on in a single day repo, and the truth that traditionally SOFR sometimes spikes above the Federal Funds goal charge ought to give investor grasp on how a fund equivalent to OPER can speculate the occasional liquidity crunches.
We expect 2023 might be a yr the place we’ll see extra outdoors occasions per liquidity occasions. We have now already witnessed one throughout the current regional banking disaster, the place the Fed needed to create a brand new facility, specifically the Financial institution Time period Funding Program, with the intention to inject liquidity within the system and avert a run on the banks.
One of the simplest ways for a retail investor to play in the present day’s setting and potential liquidity crunches is thru an instrument equivalent to OPER. The fund will have the ability to monetize greater repo charges if and after they happen, on the again of great risk-off occasions. We noticed a spike to 10% within the repo charge in 2019, and one can solely think about the income a fund like OPER could make if it takes benefit of one other related incidence. Till then, OPER will clip a excessive brief time period charge, in step with the entrance finish of the curve. We have now seen this in its historic efficiency, with OPER outperforming previously yr each (BIL) and (SGOV), which we cowl.
Efficiency
OPER is the clear outperformer right here when wanting again three years:
We’re using a complete return metric right here, which we imagine is the best strategy for money parking automobiles.
Prior to now yr, as charges have risen, OPER has nonetheless outperformed:
The online outperformance right here is decrease, however the fund nonetheless manages to ship the next complete return than its friends. We like this fund for its optionality, principally its skill to punt on potential liquidity crunches.
The fund makes positive to reveal it’s not a cash market fund, but once we take a look at its NAV we are able to observe this can be very steady:
Wanting again 4 years, we are able to discover the NAV doesn’t transfer by greater than 0.5%, outdoors the repo charge spike in 2019 when the fund had a excessive optimistic NAV transfer of 0.75%.
Holdings
As mentioned within the thesis part, the fund doesn’t maintain securities, however lends cash out through repo transactions:
OPER lends cash within the institutional lending markets versus proudly owning securities with the intention to obtain it is funding goals. These lending transactions (repurchase agreements or “repos”) are collateralized by mounted earnings securities issued by the US Treasury and authorities companies. A 3rd-party custodian holds the collateral on behalf of OPER and ensures the account is collateralized based mostly in the marketplace worth of all pledged securities. OPER ought to proceed to be a beneficiary of a rising charge setting, and could also be a lovely choice for buyers searching for present earnings and portfolio stability in mounted earnings holdings:
• OPER primarily accepts collateral issued by the US Treasury and authorities companies
• OPER receives a minimal of two% extra collateral pledged towards every lending settlement
We will see a breakout of the present lending amenities employed by the fund beneath:
Holdings (Fund)
So allow us to take a look on the first line of the collateral pool. This can be a repo facility with a June 5, 2023 maturity date and a charge of 5.14% (the fund receives this mounted charge). The fund doesn’t specify the precise CUSIP of the safety it lends towards, however as per its mandate will probably be a Treasury or Company MBS.
The fund will proceed to benefit from the perfect execution factors within the brief finish funding markets, and if we do see vital spikes in repo charges the car will have the ability to benefit from them.
Conclusion
OPER is a hard and fast earnings trade traded fund. The car focuses on the brief finish of the funding markets and employs an progressive repo lending technique. Not like different money parking automobiles, OPER doesn’t maintain securities, however reasonably acts as a cog within the brief time period funding market by lending the money it receives from buyers. Mentioned money is collateralized by Treasury or Company MBS securities (therefore no credit score danger) and can profit from each the credit score worthiness of the counterpart in addition to the market worth of the underlying securities. One of the simplest ways to consider OPER is as a ‘mini-bank’ that focuses on very brief time period loans (in a single day to 3 months) which can be collateralized by Treasury notes and MBS bonds.
We expect it is a nice construction for 2023, given its skill to benefit from any liquidity crunches. We have now seen repo charges spike to 10% briefly in 2019, and we’d see related outdoors occasions this yr. This fund is akin to a cash market fund in our opinion with the added optionality of having the ability to benefit from black swan occasions within the brief time period funding markets. OPER has outperformed each BIL and SGOV previously yr, and we anticipate it to proceed to take action. We’re a robust purchase for this identify right here for the remainder of 2023.
