Displaying items by tag: volatility

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. 

Financial advisors frequently turn to bonds when managing retirement investment risk, as they are traditionally viewed as a reliable hedge against stock market fluctuations. However, recent research suggests caution, with a Bloomberg report revealing that the bond market has experienced significant volatility in recent years, and the traditional hedging with fixed income might be inadequate. 

To circumvent losses from bond volatility, fixed index annuities (FIAs) can serve as an effective alternative. FIAs generally carry lower risks compared to bonds but they can do so at a reduced price with a much higher potential upside. Unlike bonds, FIAs can guarantee a lifetime income, providing a unique form of security for retirement planning.

Interest earned from FIAs is based on an external market index, such as the S&P 500, allowing investors to benefit from market gains without the risk of market volatility. This makes FIAs an appealing option for achieving a balanced and secure retirement portfolio.

Finsum: This really comes down to investor preferences, but stock-bond correlation is increasing which should give investors reasons to consider annuities. 

The 4% rule has become conventional wisdom when it comes to managing finances during retirement. As millions of people enter retirement over the next decade, it may be time to revise this rule, given higher inflation and longer lifespans.

Social Security benefits are typically equivalent to 40% of a retiree’s income. According to TIAA, retirees should consider pairing the 4% rule with an annuity to generate higher levels of income during retirement. This means that a retiree would convert some portion of their savings into an annuity.

In the first year, this is likely to boost income by up to 32% compared to just using the 4% rule. It also leads to more predictable income and shields retirees from market risk. More predictability can also help with more effective financial planning, leading to a more enjoyable retirement. 

Treasury Inflation Protection Securities (TIPS) are another method to increase guaranteed income, especially with a ladder across different maturities. It also protects retirees against inflation. 

Overall, the 4% rule should be reconsidered, especially in this era. It leads to less spending flexibility and should be augmented with other sources of income. It also doesn’t account for retirees’ individual circumstances, such as tax rates, risk profiles, and cash flow needs. 

Finsum: TIAA believes that the 4% rule should be reconsidered, especially for those retiring now. Retirees may need more income and should consider annuities or TIPS.

Innovator Capital Management, a pioneer in defined outcome ETFs, announced the launch of a groundbreaking ETF designed to provide investors with exposure to the equity market while ensuring a complete buffer against losses. The Innovator Equity Defined Protection ETF aims to match the upside return of the SPDR S&P 500 ETF Trust, symbolized by SPY, with a cap of 16.62%, while safeguarding against losses from SPY over a two-year outcome period.

Graham Day, the Chief Investment Officer, emphasized the surge in investor interest towards safer options like bank deposits and Treasuries amidst market concerns, hence the necessity for a low-risk market reentry strategy. Innovator's objective with the new fund is to offer clients a means to remain invested in the market with robust risk management, extending their buffer ETF range, which previously spanned buffer levels from 9% to 30%.

Since introducing the world's first buffer ETFs in August 2018, Innovator has witnessed competitors such as First Trust and, more recently, BlackRock, entering the fray with their versions. While the new strategy may not immediately entice investors due to its slightly higher risk and cost, Innovator anticipates competition with traditional cash-like instruments, highlighting the potential tax advantages alongside increased upside potential and complete downside protection.

Finsum: A full 100% buffer could be a major innovation in the risk mitigation space for ETFs.

The number of alternative investment options continues to increase, and many now consider it an essential ingredient to optimize portfolios. However, there are significant challenges that come with evaluating these investments, given that there is more complexity and advisors have less experience with the asset class.

The benefits of alternatives are higher returns, especially in high-rate, high-inflation environments, and less correlation to equities and bonds. The two biggest drawbacks of alternatives are reduced liquidity and price discovery. There are additional potential tradeoffs, such as limited transparency, higher fees, and restrictions on redemptions. Further, some alternatives use leverage or derivatives, which can increase tail risk during certain periods.  

Therefore, it’s important to study how the investment performed during periods of market volatility, such as 2020 or 2008. With some illiquid investments, the asset may look like it’s outperforming until actual transactions start taking place at lower levels. Many skeptics contend that the diversification and volatility-mitigating effects of alternatives are overestimated due to the absence of mark-to-market pricing. 

Another consideration is that evaluating alternatives has a qualitative element. This includes studying the reputation and track record of the management team. Overall, advisors and investors should understand that many of the traditional tools and methods used to evaluate public investments are not suitable for alternatives. 

Finsum: Alternative investments continue to grow and are increasingly a core part of many investors’ portfolios. However, there are many unique challenges that come with evaluating these investments.