Displaying items by tag: volatility

Sunday, 23 June 2024 08:30

When to Avoid Buffer ETFs

Buffer ETFs have grown rapidly since 2018, now totaling 159 with nearly $38 billion in assets. They attract financial advisors by offering downside protection for the first 10% to 15% of losses while allowing market gains, making them popular during volatile periods like 2022.


Experts point out that these ETFs are easier to rebalance and offer daily liquidity compared to structured notes and annuities. However, buffer ETFs cap potential gains, limiting profits when the market rises, and their performance can be affected by market timing.


They typically have a defined 12-month outcome period, and buying or selling mid-series can negate initial protections and caps. Despite their benefits, buffer ETFs have higher fees and might not pay dividends, making them less suitable for long-term investors compared to direct equity investments.

Finsum: Sometimes it’s worth paying higher fees or sacrificing a little alpha to hedge some volatility

Published in Wealth Management

In wealth management, the portfolio is the product and it’s crucial for achieving clients' long-term goals. Despite the additional services offered, the portfolio's performance is paramount. 


One key challenge is adapting portfolio construction to ever-changing market conditions, such as the recent shift to positive bond/stock correlations. Previously, low or negative correlations enhanced diversification benefits, but this advantage has lessened. 


As a result, professionals are exploring new ways to diversify, though it's important not to over-rely on these new methods. While increased correlations make reducing volatility more difficult and investors should turn to alts in these types of environments, a measured approach to diversification is essential to maintain long-term returns.


Finsum: Privates and alts are more necessary than ever to hedge the current increased stock-bond correlation. 

Published in Wealth Management

Traditionally, fixed income is where financial advisors look to reduce portfolio risk. This is no longer the case in the post-pandemic period, as the bond market has experienced major volatility, which is becoming the norm in a high-rate, high-inflation regime.

Given these conditions, investors may be better off with fixed index annuities (FIAs). Like bonds, FIAs produce income; however, a key difference is that FIAs guarantee an income stream for life as opposed to a fixed period. Another advantage of FIAs is that they have higher earnings potential than bonds, given that many are designed to earn interest based on the performance of an external index like the S&P 500. In contrast, fixed income has significantly underperformed over the last 5 years and failed to beat inflation.

Over long periods of time, costs matter when it comes to long-term investing. Most bond investments have fees that range between 0.5% and 2%. In contrast, FIAs tend to have much lower fees, on average. 

In terms of risk, FIA offers full protection of the principal investment. This means that it can be more effective than fixed income to hedge equities, especially in the current environment. Overall, FIAs can be more effective than fixed income, especially for investors who are in or nearing retirement. 

Finsum: Advisors should consider fixed indexed annuities (FIAs) as an alternative to fixed income, especially in the current environment. FIAs offer lower costs, more downside protection, and greater potential for appreciation.

Published in Alternatives
Sunday, 02 June 2024 19:32

How Model Portfolios Can Be a Win-Win

The nature of being a financial advisor has shifted significantly over the past decade. It’s gone from being centered around selecting investments and managing portfolios to financial planning and client service. Model portfolios have been ascending along with this evolution and are forecast to exceed $1 trillion in assets over the next decade.

According to surveys, clients invested in model portfolios are more likely to have higher levels of trust with their financial advisors and believe that volatility is an opportunity to grow assets. Additionally, they are more likely to be interested in other services offered by an advisor. They can also help in terms of aligning the interests of advisors, the firm, and clients. They also free up time and energy for advisors to spend on factors that ultimately drive success for advisors, like client service and prospecting. 

Another benefit is that model portfolios provide an extra layer of due diligence, with 77% of advisors saying that they help with managing risk. In essence, it gives clients access to a higher quality of investment management and a more comprehensive relationship with an advisor.

Models also mean that advisors’ services become more scalable, enabling growth and expansion. In recent years, models have expanded to include offerings from third parties and a wider array strategies, which means there are possibilities for endless customization to fit clients’ unique needs and goals.

Finsum: Model portfolios bring the promise of a win-win for clients and advisors. Clients invested in model portfolios report higher levels of confidence with their advisor and don’t fear volatility. For advisors, they offer the ability to decrease time spent on investment management and focus more on client service and prospecting.

Published in Wealth Management
Thursday, 30 May 2024 11:36

Buffer ETFs Surging in 2024

In the past two years, retirement investors have funneled over $20 billion into US exchange-traded funds (ETFs) that limit both gains and losses, challenging traditional insurance products. These "buffered" ETFs capitalize on derivatives to cushion the effects of extreme market swings and have grown popular since their 2018 debut, especially after the market turbulence of 2020 and 2022.


The draw of buffered ETFs lies in their downside protection, which has become increasingly attractive to investors seeking to safeguard their retirement savings. Financial advisers in the US have embraced these ETFs, driving $10 billion in net inflows in both 2022 and 2023, while taking market share from the $3.3 trillion annuities market and costly structured notes.


This has grown not only the size but the scope of the market with 200+ defined outcome ETFs in the US, totally a staggering $37bn. In turn new competitors like BlackRock and AllianceBernstein are joining the competition to try and capitalize on the gains from First Trust and Allianz. 

Finsum: The uniqueness of buffer ETFs really is in how they integrate derivatives to drive performance and outcomes and can present nearly all in one solutions. 

Published in Bonds: Total Market
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