“The maximum loss my overlay creates is about slightly less than a 3% loss,” Ball says. “We don’t have catastrophic losses [on the overlay], but we can have small losses than can add up over time.”
The overlay turned negative during last year’s fourth-quarter sell off. “Prior to last year we had been averaging about 5% [alpha to the underlying index], but last year’s performance pulled the average down to 3%,” he says.
Keep in mind that all five of these ETFs are 100% long to their underlying indexes, so the ultimate performance of the funds will live and die with their respective beta expsoures. If, for example, the Vanguard S&P 500 ETF in the Overlay Shares Large Cap Equity ETF loses 30% and the overlay is negative 3%, that ETF will lose more than its index. Conversely, if VOO zooms, then the fund will benefit from its overlay alpha boost.