Summary of Financial Products for Hedging with Vest Co-Founder Jeff Chang

Overview of Financial Products for Hedging with Vest Co‑Founder Jeff Chang

This episode of Masters in Business (host Barry Ritholtz, Bloomberg) features Jeff Chang — co‑founder and president of Vest — describing how Vest uses options and derivatives inside ETFs to deliver “defined outcomes”: downside buffers, capped upside, and income generation via covered‑call strategies. Chang covers Vest’s origin (founded 2012; YC in 2015), product mechanics (buffer ETFs, covered‑call/income ETFs, crypto/commodity variants), structural enablers (in‑kind ETF creation/redemption for optioned ETFs since 2019), target clients (financial professionals), and the behavioral/portfolio rationale for hedging versus plain 60/40 allocations.

Key takeaways

• Vest’s core proposition: package option strategies inside regulated funds so advisors and clients can access hedging and income without the compliance and operational burdens of trading options themselves.
• Buffer funds: protect a predefined portion of downside (e.g., first 10%) for a one‑year outcome while capping the upside at a preset level. Trade‑off = limited upside in exchange for downside protection.
• Covered‑call/income ETFs: monetize volatility and generate yield by systematically selling options (often weeklies). Typical approach: write calls on a portion of holdings (often ~20–25%) to boost distributions.
• Structural changes enabled products: in‑kind creation/redemption for ETFs with options (allowed starting Oct 2019) improved tax efficiency and feasibility of optioned ETFs.
• Target distribution: Vest focuses on financial professionals/advisors (not direct retail), partnering with issuers/exchanges (e.g., First Trust, CBOE) to scale and operate.
• Investment philosophy: these strategies are less about “get rich” and more about “stay rich” — protecting wealth and improving compounding by avoiding prolonged drawdowns.

Topics discussed

Background & origin story

• Chang’s eclectic career: U.S. Naval Academy background, CPA training, roles at World Bank, Freddie Mac (during early restatement period), trading through 2008 crisis, convertible bonds/options desks, a short stint at ProShares, then founding Vest with Karan Sud.
• Vest’s YC experience (2015) and the Silicon Valley/Wall Street cultural blend: grit and iteration vs. rigorous risk controls.

Why buffers and option‑based ETFs

• Problem they solve: structured notes/annuity counterparts previously provided buffers but carried counterparty and liquidity risk; Vest puts the hedge in an ETF/mutual fund so investors directly own the instruments.
• Example buffer outcome (simplified): a 1‑year product that protects the first 10% of S&P losses; upside participation is capped (e.g., capped at 15%).
• Benefit in volatile/uncertain regimes: limited losses in down years (e.g., 2022), preserving capital to benefit from subsequent recoveries (2023+).

Income generation via options

• Covered call funds on dividend aristocrats (ticker cited as KNG) and other asset classes (high yield, gold, Bitcoin) to produce materially higher distribution yields (Chang cited distribution yields north of 8% for some equity covered‑call ETFs, and double‑digit yields on some fixed‑income covered‑call strategies).
• Weekly option writing (weeklies) is used to capture accelerated time decay and improve yield capture versus monthly rolls.

Structural & operational mechanics

• In‑kind creation/redemption: reduces tax friction for ETF investors by enabling securities (not cash) to be exchanged at creation/redemption, important for optioned portfolios.
• Partnerships: CBOE (exchange) and First Trust (ETF sponsor) were crucial — e.g., extending trading hours for certain options (GLD options) to align with ETF close so hedges can be priced and executed appropriately.
• Risk/operational tradeoffs: capped upside, potential for positions to be called away (managed via premiums and repurchase strategies), reliance on implied vs realized volatility (selling premium when implied > expected realized).

Notable quotes & insights

• “Grit, influence, creativity, and intelligence — in that order.” — Chang on success attributes.
• “This is the stay‑rich game.” — framing buffer/hedging strategies as preservation tools for wealth owners, not get‑rich‑quick plays.
• “We cut the bank and insurance company out — instead of them hedging and issuing the note, we put the hedge in a fund and you own it.” — on Vest’s structural advantage vs. traditional structured products.
• On diversification: “Why not diversify your risk management and hedge?” — advocating hedges as a complement to bonds/equities, not a pure replacement.

Products and examples mentioned (terms as used in the interview)

• BUFR — Vest buffer ETF on the S&P 500 (example: 10% downside buffer; capped upside).
• KNG — Vest dividend‑aristocrats covered‑call ETF (uses covered calls to boost yield; cited ~8% distribution recently).
• HYTI (H‑Y‑T‑I referenced) — example of high‑yield fixed income with covered calls (cited double‑digit distributions).
• IGLD — gold covered‑call ETF (monetizes gold volatility via covered calls).
• DFII (D‑F‑I‑I referenced) — Bitcoin covered‑call ETF (target income ~18–19% while participating in a portion of upside). Note: tickers and exact fund mechanics were stated in the interview; confirm current tickers, holdings and yields with issuer materials before making investment decisions.

Practical implications & action items

For financial advisors and investors:

• Understand trade‑offs: buffers limit downside but cap upside. Covered‑call ETFs boost yield but can result in assignments and missed rallies.
• Use these products as complements to a 60/40 or other asset mixes — they change the source of risk management (hedging vs. bond diversification).
• Ask sponsors about tax efficiency (in‑kind mechanics), option counterparties, liquidity and frequency of option rolls (e.g., weekly vs monthly).
• For income seekers: covered‑call ETFs on dividend growers, commodities, fixed income and crypto can materially raise distributions — but evaluate sustainability and selection/coverage rates (percentage of holdings covered by calls).
• Advisors are Vest’s primary distribution channel — these solutions assume a professional will match product features to client goals.

Recommended follow‑ups (resources Jeff Chang referenced)

• Books: Liar’s Poker (Michael Lewis), Influence (Robert Cialdini), How to Win Friends & Influence People (Dale Carnegie), The Intelligent Investor (Benjamin Graham).
• Show: Masters in Business (Barry Ritholtz) — full episode for deeper context.
• Verify current fund factsheets and prospectuses for up‑to‑date tickers, holdings, distribution yields, and risk disclosures prior to allocation.

Final observations

• Vest’s offering packages option strategies into regulated ETFs to solve clear practical problems (operational complexity, tax efficiency, counterparty risk) and appeal primarily to advisors managing clients who prioritize capital preservation and income.
• The conversation blends market history (lessons from 2008), structural ETF innovations (post‑2019 option ETFs), and product design tradeoffs — useful for advisors and investors evaluating ways to diversify risk management beyond traditional stocks/bonds.