McElhenny Sheffield Managed Risk ETF (MSMR)

The McElhenny Sheffield Managed Risk ETF (MSMR) lets you own a diverse portfolio of large US stocks while using options to hedge against big losses. Instead of bracing for a 30% crash and hoping you can stay calm, the fund actively buys put options that pay off when the market falls hard. The payoff is steady returns with less dramatic downturns. The cost is that in strong bull markets, the hedges eat into your upside.

Think of it like car insurance. You own a car because it is useful. You buy insurance not to change the car itself but to protect yourself if something goes wrong. MSMR is similar: you get diversified exposure to a basket of large-cap stocks, but the fund also buys insurance against catastrophic moves. When the market is calm, the insurance costs money and sits unused. When the market crashes, the put options spike in value and cushion your loss.

How the hedging works

MSMR holds a diversified portfolio of large US companies — probably 80 to 150 different stocks spanning every major sector. The portfolio might be weighted somewhat like the S&P 500, or it might be customized to McElhenny Sheffield’s particular view of value and quality. Underneath, though, the fund buys index put options that give it the right to sell the market at a preset floor price.

Here is what that means: imagine the S&P 500 is at 5,000. MSMR buys a put option that lets the fund sell the index at, say, 4,500 any time in the next month or quarter. If the market crashes to 4,200, the put is worth $300 (the difference between the 4,500 strike and the current 4,200 level). The fund’s stock portfolio might be down 16%, but the put gain offsets some of that. The net result: instead of losing 16%, the fund is down 10%. If the market rallies to 5,500, the put expires worthless (it is not in the money; you do not need to sell the index at 4,500 when you can sell it at 5,500). The fund keeps its stock gains, but the cost of the unused put drags on returns.

The cost-benefit trade-off

In a year where the market is up 15%, MSMR might be up only 13% because the unused put options cost money and reduce gains. That is the price of insurance: you pay a small tax on returns in good years to get protection in bad years. In a year where the market crashes 25%, MSMR might be down only 18%, because the puts gain and offset some of the stock losses. Over a full market cycle — three or four years of mixed conditions — the insurance economics reveal themselves: you give up maybe 1–2% of the average annual return in exchange for a 5–7% reduction in maximum loss.

For a retiree who cannot afford a 30% drawdown without derailing their spending plan, that trade is attractive. For a 35-year-old who will not touch the portfolio for 20 years and can ride out crashes, the drag on returns in good years is costly. An investor needs to think about their own risk tolerance and time horizon to decide if the hedge is worth the cost.

Diversification without concentration

MSMR’s stock portfolio is genuinely diversified. It is not a single-stock fund or a concentrated sector bet. Instead, it spreads its capital across dozens of large-cap names in finance, technology, healthcare, industrials, consumer staples, and everything else. That diversification means MSMR is exposed to the broad health of the US economy and corporate profits, not to the whims of one company or one industry.

The broad diversification also means that when one sector or stock falls hard, the portfolio as a whole stays more stable. A tech crash hurts, but the portfolio still owns banks, retailers, manufacturers, and pharmaceuticals. Contrast that with a concentrated portfolio where a single stock makes up 10% or more of your assets — one bad quarter for that company is a real hit to your total return.

The tricky part: volatility decay

Managed-risk funds using options have a less obvious cost: volatility decay. Implied volatility — the market’s expectations about how bumpy the ride ahead will be — changes constantly. When implied volatility is high (the market is nervous, options are expensive), buying puts costs a lot, and the hedge is expensive. When implied volatility is low (the market is calm, options are cheap), the puts are bargain-priced, but by the time you might need them, implied volatility might be high again. A fund that regularly rolls or rebalances its hedges buys puts sometimes at high prices and sometimes at low prices, averaging out somewhere in the middle.

If implied volatility falls sharply after you buy the hedge (because the market calms down), your puts are worth less and the hedge is a sunk cost. If volatility soars right after you buy (a market panic), the puts are incredibly valuable. This path-dependency is hard to predict, and it is why the long-term returns of hedged strategies are hard to forecast from theory alone.

Expense ratio and fund management

MSMR’s expense ratio is typically higher than an unhedged large-cap index fund (maybe 0.50–0.80% annually) because the fund is paying for the cost of the options hedge and the ongoing management. An unhedged S&P 500 index fund might cost 0.03–0.10%, so the difference is real. The question is whether the smoother returns justify the cost.

The fund is managed actively in the sense that the options overlay requires decisions: when to roll the puts, what strike to choose, how long-dated the puts should be, how much to spend on the hedge. These are decisions that can be made better or worse, and that variability is why track records matter. One MSMR-like fund might be exceptionally well managed and deliver great risk-adjusted returns. Another might be poorly managed and give you expensive puts that do not pay off when they should.

When to consider MSMR

MSMR is most appealing to someone who is uncomfortable with the bare idea of owning stocks because of the possibility of a crash. It is also useful for someone in or near retirement who needs the portfolio to last 30 years and cannot afford a year where it falls 40% — even if that is mathematically survivable, the emotional and spending impact might be too large. For someone who is young, employed, and can save more money when the market crashes, the cost of the hedge is harder to justify.

The fund does what it says: it gives you diversified stock exposure while trying to cushion the falls. But the cushion is not free, and in quiet bull markets, that cost is visible as a drag on returns. An investor should look at the fund’s actual returns over a full market cycle (including both good and bad years) versus an unhedged alternative to judge whether the hedge has delivered its promised benefit or simply transferred money from shareholders to the option sellers.

Related concepts: hedge, put option, implied volatility, diversification, portfolio insurance, downside protection, opportunity cost, risk-adjusted return