Displaying items by tag: etf

Since their launch three decades ago, exchange-traded funds (ETFs) have become a favored investment vehicle. ETFs, which trade like stocks but hold baskets of securities, saw significant growth in 2024, with more money flowing into ETFs than individual stocks. 

U.S.-based ETF assets hit a record $9 trillion in May, experiencing net inflows while mutual funds saw outflows. Investors are attracted to ETFs due to their low cost, ease of trading, and tax efficiency. The recent approval of cryptocurrency ETFs has further boosted their popularity, while actively managed ETFs are also on the rise. 

The iShares Core S&P 500 ETF (IVV) offers broad exposure to large-cap U.S. stocks at a low expense ratio of 0.03%. The iShares Core S&P Mid-Cap ETF (IJH) provides access to mid-cap companies with no overlap with large-cap holdings. The iShares Core S&P Small-Cap ETF (IJR) focuses on profitable small-cap companies, giving it a high-quality tilt that has outpaced the Russell 2000 in recent years.

Finsum: Cost effective ETFs are also great tools to get market segmentation exposure. 

The conversation about rate cuts is heating up again as we move into 2024. Signals from the Fed hint at potential rate reductions, spurred by weaker job numbers and rising unemployment. With a lackluster June jobs report and unemployment up to 4.1%, a September rate cut looks increasingly likely. 

For investors, active ETFs offer a strategic response, providing flexibility and potential advantages over passive index funds. These ETFs can adapt to market shifts, benefiting from lower borrowing costs for smaller growth companies. 

As the market concentrates on a few mega-cap firms, active ETFs can diversify risk and capitalize on emerging opportunities. In light of these dynamics, active strategies present a potent option for investors adjusting to the evolving economic landscape.

Finsum: Active management could prove fruitful if interest rates fall and they can capitalize on, say, growth opportunities like tech. 

Buffered ETFs are seeing explosive growth. The category had less than $200 million in assets and now has $36.7 billion. The major appeal is that they allow investors to remain fully invested while offering downside protection. 

However, they do tend to have higher costs and may not be appropriate for many investors. Buffered ETFs follow a benchmark while also using stock options to limit downside risk and capping gains on the upside. 

These products are modeled after structured notes, which have proven to be popular among high net worth and institutional investors. Like structured notes, buffered ETFs follow some sort of lifecycle, which means that advisors and investors have to consider market conditions when making a decision. This means they are not appropriate for rebalancing or dollar cost averaging strategies. An important consideration is the start date of the buffer ETF and the performance of the underlying index since the start date, as this could affect the value and desirability of the buffer.

According to Jeff Schwartz, president at the investment analytics firm Markov Processes International, “There is a lot to understand with buffer ETFs, and the history of structured products shows that both advisors and investors often do not fully understand the nuance of these vehicles." 

Finsum: Buffered ETFs are experiencing a surge in growth. The upside is that they allow investors to remain fully invested while capping the downside. However, there are also some downsides to consider.   

Last month, Innovator launched the Innovator Nasdaq 100 Managed Floor ETF (QFLR). The ETF is designed to offer investors exposure to the performance of the Nasdaq 100 while capping losses at 10% over a 12-month period with an expense ratio of 0.89%.

Innovator achieves this by using a laddered put option strategy managed by Parametric, a Morgan Stanley affiliate, in concert with investing in the securities held by the Nasdaq 100. With these put options, the fund hedges against downside risk while reducing volatility in exchange for upside performance. 

According to Graham Day, Chief Investment Officer at Innovator, “Historically, in positive years, the Nasdaq-100 has averaged returns of 29%, but in negative years it has averaged losses of -30%. Most investors are unable to stomach this type of volatility, and QFLR is a solution to allow investors to remain fully invested in the Nasdaq-100 with built-in risk management.” 

2022 and 2023 illustrate the value of QFLR as double-digit losses in the Nasdaq led many investors to reduce equity exposure and miss out on the big rally in the following year. Previously, Innovator launched the Innovator Equity Managed Floor ETF, which has $132 million in assets. The fund tracks an index of large-cap US stocks and limits losses to 10%. According to Innovator, it essentially captures about 80% of upside while limiting volatility to 70%. In the press release for QFLR, SFLR investors saw about 80% of the equity portfolio’s upside but only 70% of the volatility.

Finsum: The private credit market has boomed over the last couple of years due to anemic public markets and hesitant banks. Now, banks are once again competing for business and offering more favorable terms.

A noteworthy development in 2024 has been soaring uranium prices. The radioactive metal was up more than 90% in 2023 and is now at its highest levels since 2007. According to Ole Hansen, the head of commodity strategy at Saxo Bank, this move is being driven by increased demand from ETFs holding physical inventory and utilities who were not hedging due to years of low prices. 

Prices moved past $100 per pound last week following an announcement from Kazakhstan's state uranium company that it may fail to meet production goals due to construction delays and difficulty sourcing raw materials. This follows a slew of production downgrades from a variety of producers in 2023, adding to pressure on the supply side. 

On the demand side, analysts point to the Sprott Physical Uranium Trust and Yellow Cake as marginal sources of gold demand, contributing to the ‘squeeze’. As a result, many now expect uranium to exceed all-time highs from June 2007 of $136 per pound, and uranium miner equities have also been following the metal higher. 

Longer-term, many believe that the uranium market is at a deficit given the gap between yearly production and consumption. Currently, the gap has been made up by huge amounts of secondary supply, yet this inventory is also rapidly being depleted.  

Finsum: Uranium prices have continued momentum from last year. Many believe new, all-time highs are in store given increased demand from ETFs and utilities, while production is impaired.