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ETFs using options to hedge have raked in $5 billion in the last year. Simplify CEO on his firm’s strategies

Options are getting popular in the exchange-traded fund world.

ETFs that use options have raked in around $5 billion in the last year, a sign that investors are growing more interested in alternative strategies that aim to protect or enhance their portfolios even as stocks hit records.

That's according to ETF Trends' Dave Nadig, who told CNBC's "ETF Edge" on Monday that his firm has been tracking these types of products while they've gained traction.

"A lot of advisors we talk to really talk about this tipping-point market we're in where it feels every day like things are a little overvalued, but they could melt up or melt down on almost any catalyst. That's why you're hedging here," said Nadig, ETF Trends' chief investment officer and director of research.

However, "you have to assume you're going to underperform if the markets are sort of boring and flat or slowly rising," which is not unusual as of late, he warned.

One firm's strategies rely less on market timing and more on calculated risk.

Simplify ETFs' broad-based equity funds use options overlays to hedge against downside in otherwise passive strategies, a sort of insurance for when markets do reach volatile extremes, its chief executive told CNBC.

"Everyone's seeing all of the metrics around extreme market valuations and we know a lot of the froth in this market … will come down at some point. We don't know when," Simplify co-founder and CEO Paul Kim said in the same interview.

Simplify's largest product, the Simplify U.S. Equity PLUS Downside Convexity ETF (SPD), has 3% of its portfolio in put options to protect against downside when markets pull back. The rest of it is invested in the iShares Core S&P 500 ETF (IVV). Simplify's U.S. Equity PLUS Convexity ETF (SPYC) has a similar structure, but uses call and put returns to augment upside returns while hedging downside risk.

"You pay a little bit for a small probability of a very large return," Kim said. "Think of it more as almost like a catastrophic insurance instead of trying to overpay for perfect hedging, which will then drive all the returns out of a hedged strategy."

"In today's environment where bonds are struggling to deliver that portfolio diversification, direct hedges using options are powerful," he said.

SPYC hit a record high on Monday.

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