(New York)

The market has been doing great. So great in fact, that many are nervous about a swift correction. Despite this, the market continues to push for new all-time highs each week. Credit Suisse weighed in on the market in a big way this week. To be clear, the bank is not exactly bearish on the market. Their overall position is “We have remained overweight equities on the back of highly supportive policy, a high ERP [equity risk premium], the start of a bond-for-equity switch and huge excess liquidity, while tactical indicators are not yet sending a sell signal”. That said, the bank warned that there was one very “high” risk to the market: the Fed. Credit Suisse thinks there is a good chance that the Fed suddenly gets less dovish in the second half of the year after some good growth in 1H. This would be a dramatic turn for investors and could risk a sharp reversal.

FINSUM: We have to agree with this risk. The huge stimulus and excess liquidity which are flooding the market are major tailwinds, so if they reversed, it would be a shock. The whole set up reminds of us what occurred in Q4 2018.

(New York)

A combination of factors have thrust annuities into the spotlight recently. These include super low interest rates, market volatility, and a major demographic trend of retirees. With that in mind, instead of talking about annuities’ benefits, we thought it would be worth some time to focus on their downsides. Given the audience of this article (advisors), we will leave out some of the ways annuities have been mis-sold and focus on the underlying products. In terms of their core drawbacks, there are essentially three: limited upside, surrender fees, and fixed payments. Limited upside should be fairly obvious, but most annuities limit the potential upside buyers can earn in exchange for principal protection and/or fixed payments. Surrender fees are another issue, as buyers can be hit with 7-10% “surrender” fees if they try to get out of the contract and receive their principal back. And finally, fixed payments lose value quickly, especially over a long-time horizon, because of inflation.

FINSUM: Annuities are as useful as the client you are selling them to. They definitely have a role in a portfolio, but their risks and benefits need to be well understood—which has not always been the case! One key issue is that many times the same reason people need annuities—retirement cash flow security—means they are at risk of exercising one of annuities biggest downside: surrender fees.

(New York)

Special Purpose Acquisition Companies (SPACs) or “blank check companies” soared to notoriety in 2020. Though not a new financial instrument, they raised around $80bn from 237 deals in 2020, which is more capital than in the last decade combined.  BlackRock CEO Larry Fink has even suggested that SPACs could come to replace the traditional IPO process.

So what can we expect from SPACs in the coming year and how can investors maximize gains in this space? Market conditions and the macroeconomic level both suggest an environment that will continue to support SPAC popularity. Low interest rates make SPACs a low opportunity-cost option. Combined with the downside protection of the cash being stored in treasury bills until a target company is identified, and the flexibility they offer in the option to pull out before the merger, they will remain a reasonable choice for those looking to capitalize on a post-Covid recovery and high equity valuations. 

SPAC popularity has been propelled by the involvement of credible, experienced backers (Michael Klein, Bill Ackman etc.), something which seems unlikely to fade in the near future. Chamath Palihapitiya, for example, has formed 6 SPACs (A to E) ranging in value from $350m to $1bn, and has indicated his intention to complete the alphabet! According to BTIG there are 210 SPACs currently searching for an appropriate target company, with time limits of 18-24 months.^[1] And Goldman Sachs have suggested that more than $300bn worth of SPAC stock could be issued over the next two years.^[2]

SPACs are democratizing the traditional IPO process, giving financial advisors and individual retail investors access to an IPO private equity style of investing which had previously only been available to large institutions. But while the momentum continues, it’s not easy to pick the winners. Not all of the 2020 completed SPAC deals saw the strong growth of Virgin Galactic (up 73%[3]) or Draft Kings (up over 400%[4]) after their mergers. This is where a SPAC ETF offers exposure to this growing space, while mitigating the risk of backing one specific deal.

Defiance ETFs recently launched SPAK, the first SPAC ETF, which tracks a rules-based, weighted index of SPACs both in the pre-merger “blank check” stage (40% of the index) and for two years following the merger (60% of the index).  SPAK thereby seeks to give investors diversified access to the whole flow of the SPAC IPO process, including the gains which can accompany and emanate from a successful merger. SPAK groups the most liquid, compelling and innovative SPAC and SPAC-originating companies, but potentially mitigates risk of overexposure to any one deal – no security in the index exceeds a relative value of 12%, and no more than 45% of the index is comprised of stocks that each represent over 5%. The index is passively managed, which explains its expense ratio (0.45%), while its constituents are reviewed monthly to ensure that the ETF captures the potential dynamism of the SPAC space.

The Funds’ investment objectives, risks, charges, and expenses must be considered carefully before investing. The prospectus contains this and other important information about the investment company. Please read it carefully before investing. A hard copy of the prospectus can be requested by calling 833.333.9383 or going to www.defianceetfs.com .

Investing involves risk. Principal loss is possible. The Fund invests in companies that have recently completed an IPO or are derived from a SPAC. These companies may be unseasoned and lack a trading history, a track record of reporting to investors, and widely available research coverage. IPOs are thus often subject to extreme price volatility and speculative trading. These stocks may have above-average price appreciation in connection with the IPO prior to inclusion in the Index. The price of stocks included in the Index may not continue to appreciate and the performance of these stocks may not replicate the performance exhibited in the past. In addition, IPOs may share similar illiquidity risks of private equity and venture capital. The Fund is new with a limited operating history.

Defiance ETFs are distributed by Foreside Fund Services, LLC.

n.b. This content was composed and paid-for by Defiance ETFs and is not FINSUM editorial.

[1] “2020 Has Been the Year of SPAC IPOs: Here Are the Prominent 4,” Sanghamitra Saha, December 28, 2020.

[2] “Goldman Strategists Say SPACs May Spur $300 Billion M&A Activity,” Joanna Ossinger, December 14, 2020.

[3] “Is Virgin Galactic a Buy After a New Space Stock ETF was announced?” Manisha Chatterjee, Jan 25, 2021.

[4] “DraftKings, Skillz SPAC Team Launch $1.5 Billion Spinning Eagle: What Investors Should Know,” Chris Katje, December 28, 2020.

(New York)

According to both Morgan Stanley and Goldman Sachs, last week’s retail-driven chaos was nothing…Read the full story here on our partner Magnifi’s site.

(New York)

If you were to design a tailwind for the robotics sector, what would it look like. Perhaps a pandemic…Read the full story here on our partner Magnifi’s site.

(New York)

Thematic ETFs have been one of the market’s bright spots over the last couple of years. For evidence of this…Read the full story here on our partner Magnifi’s site.

(New York)

A few weeks ago we ran a story about Apple planning for its own-branded car. At the time, most analysts thought Apple would wait until self-driving cars became a mainstream reality before doing so—which made it seem like it would be 5 years or so. Well, in what comes as a major announcement, Apple is close to finalizing a deal with Kia to produce a branded Apple car for them in the US. Morgan Stanley analyst Katie Huberty explained why this is so exciting in just four short sentences: “Smartphones are a $500bn annual TAM. Apple has about one-third of this market. The mobility market is $10 trillion. So Apple would only need a 2% share of this market to be the size of their iPhone business”.

FINSUM: Apple is not only the world’s biggest player in smart phones, but it has a fiercely loyal follower base. It is hard to imagine the company would not get to 2% market share in mobility within 3 years at the most. This is the kind of announcement that could propel Apple on a big run for the next few years.

(New York)

Most investors don’t fully understand the differences and benefits between fixed annuities, variable annuities, and fixed index annuities, so it is only natural that most clients would not even begin to understand deferred annuities and their benefits. Deferred annuities work just like other types of annuities except they explicitly defer any payouts for a set number of years. It is essentially a lump sum that gets invested, with no planned withdrawals for, say, 20 years. In many ways that makes them like an IRA. These can be very useful for clients who have are conservative in their outlook, have a nest egg to buy an annuity, and don’t need income right away.

FINSUM: In our view this is a perfect product for Millennials and Gen X who are 15 years or more from retirement. It is like a self-funded IRA and completely fits with Millennials’ bearish view of markets and the economy. It may also be a good choice for clients who tend to overspend, as this can do a good job protecting them from themselves.

(New York)

Momentum funds often get bad press. While they have obvious utility, a lot of people say they feed bubbles and are subject to very big losses from market corrections. That said, some funds have started to do an excellent job at both hedging and outperforming to the upside. While that might sound impossible, it is not as hard as it sounds. The key is to follow the market’s movement, but not try to predict it. In other words, in strongly upward markets, you position yourself very bullish (e.g. 200% exposure). In downward markets, you take an inverse or short exposure to profit from losses. In a decent market you simply stay at 100% long exposure. By using this approach you can participate it more of the upside and lose less on the downside.

FINSUM: This is a smart strategy and one that some momentum funds are using to outperform the market right now. It can be employed either by buying funds or with an options strategy.

(Washington)

Biden has officially made his new SEC pick—Gary Gensler. And while the nomination has not gotten much press, what comes next may. Many fiduciary advocates and those on the left are making a big push for a change to Reg BI, and not just in terms of its actual content, but the name itself. “New suitability standard” is a name that has been floated for example. One industry lawyer, Brian Hamburger, put it this way, “Brokers, as they are registered as brokers, are representative of products; they derive their powers by way of a selling agreement between product manufacturers or investment products; and the dealer component, where they have an obligation to distribute that as appropriate to customers … That is a far cry from having to act in a client’s best interest”.

FINSUM: Most readers here are probably thinking “who cares what it is called”, but that is not the root of the matter. Rather, the name may be a symbolic first step of a major overhaul and the creation of a true fiduciary standard by the SEC.