SCMY provides a 15% downside buffer against small-cap losses over a one-year period starting each May, while capping upside gains. It's designed for investors who want small-cap exposure but can't stomach the sector's notorious volatility.
How It Works
The fund uses a options collar strategy on small-cap stocks, buying puts 15% below the starting level and selling calls to fund the protection. The buffer resets annually each May, with upside capped at a level determined by options pricing at reset. Between resets, the buffer and cap levels float with the fund's NAV, creating a moving protection zone.
Key Features
- 15% downside buffer specifically for small-caps, where 20-30% drawdowns are common
- Annual May reset provides predictable entry points for protection seekers
- Zero expense ratio makes it cheaper than buying protective options directly
Risks
- Losses beyond 15% hit dollar-for-dollar — a 25% small-cap crash still costs you 10%
- Upside cap could limit gains to 8-12% in strong years when small-caps might return 30%+
- Buffer effectiveness degrades if bought mid-period — protection isn't from your purchase price
Who Should Own This
Best for investors approaching retirement who need small-cap allocation for growth but can't afford a major drawdown. Also works for advisors managing nervous clients who pulled money after past small-cap selloffs. Hold for exactly one year from May reset for optimal protection.