Have you ever thought to yourself “I would love if they could put the downside protection of structured products into an ETF”? Probably not, but someone did, as there is a new category of ETFs, called Buffer ETFs, which are seeing big capital inflows. The ETFs work by guaranteeing only a certain level of losses in exchange for limiting potential gains. The ETFs have a year-long term, and their details change constantly. But a good example would be one with a 9% “buffer”. This means that if the ETF loses 12% in the year, the holder would only see a 3% loss and the product provider would absorb the rest. The first and only provider of these ETFs is called Innovator and has partnered with MSCI, Nasdaq and more to create a handful of exchange traded funds. Check out KOCT, NOCT, EJUL, and IJUL.
FINSUM: These are very tricky ETFs, just like the structured products from which they drew their inspiration. That said, they seem like they have some utility if they are executed properly.
Vanguard is a pretty tough firm to beat in the mutual fund space. Their sterling reputation is hard to top, and no one seems to outdo them in the asset class. However, there may be a viable competitor: boutique manager Dodge & Cox. In fact, the fund manager just got ranked first out of 150 mutual fund companies by Morningstar. The rankings are based “on a variety of factors, including analyst fund ratings, expense ratios, and corporate stewardship”. Perhaps most importantly for investors, almost all Dodge & Cox mutual funds beat their category averages over the last decade.
FINSUM: Dodge & Cox has outperformed Vanguard in many ways, though obviously Vanguard can offer lower costs than anyone else. In many cases, though, performance has been good enough to more than account for the difference in fees.
You may not know the name Michael Burry off hand, but you probably should. He was one of the investors who made a fortune as part of the “big short” during the Financial Crisis. Well, he has come back into the limelight this week with an eye-opening warning. He argues that ETFs, and indexing generally, are essentially the same as CDOs were before the crisis. He explains that the massive capital inflows into ETFs have eliminated any realistic pricing mechanism for underlying stocks, just like huge demand for structured credit inflated all asset prices before 2008. Additionally, the daily liquidity underlying many of the stocks in index funds is vastly lower than the index funds themselves (again, just like CDOs). Burry uses a theater metaphor, saying that the theater has grown much more crowded, but the exits are still the same size.
FINSUM: This is a great argument, and one that seems to have fundamental truth to it. However, even Burry admits that he has no idea when this “bubble” might actually burst.
Vanguard made some headlines earlier this month when it re-opened one of its long closed-to-new-investors dividend funds (VDIGX). However, it was not the only fund to reopen, as a whole suite of Vanguard dividend funds are once again available. The funds come in two flavors, active or passive. VDIGX is actively managed and has the best one-year return, but it is almost the most expensive. Check out the firm’s VIG fund (Dividend Appreciation), which has a 11% one-year return and charges only 6 basis points.
FINSUM: This whole suite of funds has a good track record and some have characteristically low fees.
The inverted yield curve has investors feeling down on their luck at the moment. What is the best way to play the turmoil and volatility? The answer may be in two seemingly unlikely places. The first is in energy ETFs, especially oil. Energy stocks have traditionally done very well during inverted yield curves, so an ETF like XLE seems like a good bet right now. Additionally, tech ETFs such as Vanguard’s VGT could be a good play, according to Bloomberg. Tech has often done well during inversions in the past.
FINSUM: Recommending a tech ETF right now is the height of contrarianism. Tech is basically caught in the middle of the trade war, and frankly, seems like a bad buy.