ETF Strategies Explained for Dummies (With Examples)

Collateralized Loan Obligation (CLO) ETFs

CLOs are bundles of senior loans, usually made to companies with lower credit ratings, that get packaged together and sold to investors.

What makes CLOs different is their “waterfall” structure, where cash from the loan payments is split into slices called tranches. The top tranches get paid first and are considered safer with lower yields, while the lower tranches take on more risk and offer higher potential returns.

Unlike older and riskier CDOs, which often included subprime mortgages, CLOs are backed by loans to real operating businesses, giving them a different risk profile and a stronger track record during market stress. However, they remain complex instruments.

Examples: Janus Henderson AAA CLO ETF

Managed Futures ETFs

Managed futures ETFs are funds that use rules-based strategies to follow trends in different asset classes, like currencies, commodities, stock indices, and fixed income.

They typically go long when prices are rising and short when prices are falling, aiming to profit from momentum rather than buy and hold. These ETFs invest through futures contracts and rebalance regularly based on signals from things like price movements or volatility.

While the strategy is complex under the hood, the goal is straightforward: provide returns that are uncorrelated with traditional stocks and bonds, especially during volatile markets.

Examples: iMGP DBi Managed Futures Strategy ETF

Risk Parity ETFs

Risk parity ETFs aim to spread out risk evenly across different asset classes like stocks, bonds, and commodities, instead of just splitting the portfolio by dollar amounts.

Since each asset class behaves differently, the ETF adjusts the weights so that no single one dominates the overall risk. For example, because stocks tend to be more volatile, they get a smaller share, while bonds and sometimes commodities get more weight or even some leverage to balance things out.

The goal is to build a portfolio where each piece pulls its weight equally when it comes to overall risk, which can help smooth returns over time.

Examples: RPAR Risk Parity ETF

Tail Risk ETFs

Tail risk ETFs are designed to protect against rare but severe market drops. They typically come with what's known as negative carry, meaning they tend to lose money during normal markets in exchange for big potential payoffs during crashes.

These ETFs often hold long positions in options, like put spreads on major indices, or use long volatility strategies that benefit when market turbulence spikes. Both act like insurance.

While they can help cushion losses during sharp downturns, they aren't meant to generate steady returns and are usually used as a tactical hedge within a broader portfolio.

Examples: Cambria Tail Risk ETF

BuyWrite ETFs

Also known as covered call ETFs, these ETFs hold a portfolio of assets and generate income by selling call options on them. The idea is to collect option premiums in exchange for giving up some future upside.

These ETFs can differ in how much of the portfolio they cover with calls, the strike prices they target (called "moneyness"), and how long until the options expire. Some use short-term contracts, including zero days to expiry (0DTE), while others hold longer-dated positions.

The underlying assets can vary too, ranging from individual stocks to indexes, and in some cases even bonds or crypto via other ETFs with options chains.

Examples: JPMorgan Equity Premium Income ETF

Defined Outcome ETFs

Also known as buffer ETFs, these are designed to cap your upside and limit your downside over a set period, usually one year. They track the price return of a reference asset, like the S&P 500, and aim to provide a preset range of returns.

For example, you might get the first 10% of losses protected and gains up to a certain cap. To get the full benefit, you need to buy on the first day of the outcome period and hold until the end.

These ETFs use FLEX options to build their exposure, which are customizable options traded on an exchange. The strategy is similar to old-school structured notes but offered in ETF form with lower fees and better transparency.

Examples: Innovator U.S. Equity Power Buffer ETF – July

Please note that this article reflects the author’s personal views and does not represent the opinions of the publication or its affiliates. It is for informational purposes only and does not constitute investment advice. It is essential to seek guidance from a registered financial professional before making any investment decisions.