Displaying items by tag: volatility

Investors concerned about exchange-traded funds (ETFs) with options overlays limiting returns should consider the benefits these strategies offer. According to Tony Rochte, Morgan Stanley’s global head of ETFs, options serve as a hedge against significant losses, offering downside protection even if upside gains are capped. 

This approach encourages investors to re-enter the broad-based equity market, reducing their exposure to fixed-income products. Alison Doyle, Nasdaq’s head of ETP listings, highlighted the growing popularity of active ETFs, with over 75% of all ETF launches in 2023 being active. 

Among these, a significant portion included options-embedded strategies, providing additional risk management tools. This trend shows a shift from traditional fixed-income investments to risk assets.

Finsum: With stocks and bonds becoming more correlated, investors should consider outside strategies like overlays to hedge. 

For those who find the pain of losing money more intense than the pleasure of making a profit, there are defined-outcome or buffered ETFs. These funds, which cap potential gains in exchange for limited losses, have gained popularity since their debut in 2018. Now numbering around 270 with $47 billion in assets, these ETFs surged in interest after poor market returns in 2022.

Buffered ETFs cater to conservative investors, including those nearing retirement, who want to stay invested in the stock market while minimizing risk. Typically offering protection for a set period, usually a year, they limit potential upside in return for a cushion against losses. Major financial firms like Innovator, First Trust, AllianzIM, and Fidelity offer these funds.

Though complex, requiring thorough explanation, these ETFs are mainly used by financial advisors for their clients, presenting a balanced investment strategy by offering various levels of risk and reward to suit different needs.

Finsum: When the probability of volatility is high a buffer ETF can be a great natural hedging solution. 

Actively managed exchange-traded funds (ETFs) are projected to quadruple their assets to $4 trillion globally by 2030, according to BlackRock. 

These funds are gaining traction, making up 70% of U.S.-listed ETF launches in the first half of 2024, driven by investor demand for strategies that can navigate market volatility and offer potential outperformance. The growth of active ETFs has been facilitated by a 2019 SEC regulatory change, which lowered barriers to entry and encouraged innovation.

Despite their higher costs, active ETFs are increasingly popular for their tax efficiency and flexibility. BlackRock projects the overall ETF industry will double its assets to $25 trillion by 2030.

Finsum: Volatility is driving a lot of active investment inflows, but this trend is set to continue as so much uncertainty remains. 

As market volatility persists, major equity indexes hit new highs, prompting investors to shift from AI and technology stocks to small-caps. The Dow Jones rose 700 points on July 16, achieving a record high, while the S&P 500 followed suit, driven by interest rate cut hopes. 

Natixis Investment Managers advises using selective, active strategies and high-conviction portfolio construction to navigate market peaks. They recommend not waiting for stock declines, as equity markets historically increase 70% of the time. 

For an offensive strategy, focus on growth-oriented, small, and midcap stocks. Active management and model portfolios can help manage risks and optimize tax implications.

Finsum: Prepping your portfolio for the fall election is more crucial than ever. 

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