Why ClearShares OPER ETF?

After raising short-term interest rates by 1.00% in 2018¹, the Fed reversed direction with 3 cuts totaling .75% in the second half of 2019².  In an effort to combat the negative economic effects of the COVID-19 pandemic, the Fed sharply reduced short-term rates by 1.50% in March 2020³ to an effective rate of zero for most cash investors.  The concurrent market volatility and uncertainty resulted in losses for some ultra-short bond ETFs as well as negative yields in T-Bills.   Many of these ETFs held short maturity corporate bonds, commercial paper, and even private-issue mortgage-backed securities in order to achieve their investment return objectives.  When funds started to sell these credit-sensitive securities to meet redemptions, it only increased market volatility, requiring Fed intervention to stabilize markets4. These dynamics have presented a challenge for investors seeking capital preservation to achieve even a nominal yield.

ClearShares Ultra-Short Maturity ETF (NYSE: OPER) seeks to fill this return void and provide an alternative to non-yielding cash investment options.  OPER lends money in the institutional lending markets as opposed to owning securities in order to achieve it’s investment objectives.  These lending transactions (repurchase agreements or “repos”) are collateralized by fixed income securities issued by the US Treasury and government agencies.  A third-party custodian holds the collateral on behalf of OPER and ensures the account is collateralized based on the market value of all pledged securities.  OPER may be an attractive cash investment option  for investors currently using low-yielding investment products given the following considerations:

  • OPER could replace existing cash products or share the role with other ultra-short portfolio holdings.
  • While OPER is permitted to hold securities, it typically does not when employing it’s core investment strategy, which may reduce sensitivity to market volatility and yield curve risks
  • OPER  primarily accepts collateral issued by the US Treasury and government agencies
  • OPER typically receives a minimum of 2% excess collateral pledged against each lending agreement
  • OPER has historically paid  a monthly distribution based on interest earned from these “repos”
  • The Fund is daily priced, daily liquid, and trades on the New York Stock Exchange

What is a Repo

Repurchase agreements (“repos”) are short-term funding transactions widely used by banks, securities firms, and hedge funds to finance their securities inventory. They utilize this vehicle for its liquidity and safety. A repo is the sale of a security with a simultaneous commitment by the seller to repurchase the security from the buyer at a future date at a higher, predetermined price. This price differential represents the interest earned on the lending transaction.  This transaction allows one party (the seller) to obtain financing from the other party (buyer).

A repo is secured by collateral, protecting the buyer against the potential risk of the seller being unable to repurchase the securities as agreed. The transaction from the lender’s perspective is called a reverse repurchase agreement (“reverse repo”) and may also be thought of as a collateralized loan.  Repurchase agreements are typically short-term agreements and their maturity period is called the “term” or the tenor. 


What is it?

Tri-party repos are the most common type of repo and are popular because of their operational efficiency and safety. In this type of arrangement, the buyer and seller agree to the terms of the transaction and report the details to a third-party custodian (BNY Mellon).  BNY Mellon, one of the largest financial institutions in the world, serves as the fiduciary/custodian for participants in the tri-party repo market. Specifically, BNY Mellon handles all settlement and operational issues associated with the tri-party repo transactions, and ensures the buyer’s account has the agreed class of securities and is over-collateralized per the trade terms.

When the buyer (lender of cash) and the counterparty (borrower of cash) execute a transaction, the collateral and cash flow through one custodial bank.  OPER ETF utilizes BNY Mellon for it’s tri-party transactions to provide clearing and trade settlement services, collateral pricing, and to help facilitate collateral substitution.

Sources:

  1. Federal Reserve Bank of New York
  2. Federal Reserve Bank of New York
  3. Federal Reserve Bank of New York
  4. Federal Reserve Bank of New York


The Tri-Party Repo Process


Investment Process

Past performance is not indicative of future results. References to efforts to mitigate or “control” risk reflect an effort to address risk, but do not mean that the portfolio risk can be completely controlled. All investment has risk, including the risk of loss of principal. 

Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV) and may trade at a discount or premium to NAV. Shares are not individually redeemable from the Fund and may be only be acquired or redeemed from the fund in creation units. Brokerage commissions will reduce returns. The Fund invests in fixed income securities, that involves certain risks including call risk, credit risk, event risk, extension risk, interest rate risk & prepayment risk. Repurchase agreements may be construed to be collateralized loans by the Fund, and if so, the underlying securities relating to the repurchase agreement will only constitute collateral for the seller’s obligation to pay the repurchase price. If the seller defaults on its obligation under the agreement, the Fund may suffer delays and incur costs or lose money in exercising its rights under the agreement. A seller failing to repurchase the security coupled with a decline in the market value of the security may result in the Fund losing money. The Fund may invest in repurchase agreements that are deemed illiquid due to having a term of more than seven days. Please refer to the prospectus for additional risks of investing in the fund.

Before investing you should carefully consider the Fund's investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by clicking here. Please read the prospectus carefully before you invest.

ClearShares LLC is the investment advisor to ClearShares OPER ETF. The ClearShares ETFs are distributed by Quasar Distributors, LLC.

Investment Company Risk. The risks of investing in investment companies, such as the Underlying Funds, typically reflect the risks of the types of instruments in which the investment companies invest. By investing in another investment company, the Fund becomes a shareholder of that investment company and bears its proportionate share of the fees and expenses of the other investment company. The Fund may be subject to statutory limits with respect to the amount it can invest in other ETFs, which may adversely affect the Fund’s ability to achieve its investment objective. Investments in ETFs are also subject to the following risks: (i) the market price of an ETF’s shares may trade above or below their net asset value (“NAV”); (ii) an active trading market for an ETF’s shares may not develop or be maintained; and (iii) trading of an ETF’s shares may be halted for a number of reasons.

Management Risk. The Fund is actively-managed and may not meet its investment objective based on the Adviser’s success or failure to implement investment strategies for the Fund.

New Fund Risk. The Fund is a recently organized, diversified management investment company with no operating history. As a result, prospective investors have no track record or history on which to base their investment decision. Additionally, the Adviser has not previously managed a registered investment company, which may increase the risks associated with investments in the Fund.