More retirees opting for ‘good enough’ stock strategy to protect money
Retirees and investors approaching retirement are in a difficult situation. They need growth from their stock market portfolios to combat inflation and rising health care costs, but another major market decline could leave stocks in a “losing spell” with no time to wait.
As a general rule in the current investment age, many financial companies tell newly retired people to keep more than half of their portfolio in stocks and reduce that amount as they get older. Once upon a time, a 65-year-old man with 50% of the shares would have been seen as aggressive. But the US stock market is record-highly concentrated (about one-third) in a handful of big tech stocks. S&P 500 – Concerns about an AI bubble and major market correction are warranted.
According to research by former Obama White House advisor Harvard economist Jason Furman, chip sales Represented roughly 92% of GDP growth in the first half of the yearand without chip sales, the US economy would have grown by 0.1%. Federal Reserve chairman Jerome Powell said in his latest FOMC meeting on Wednesday that artificial intelligence is a significant source of growth for the US economy, unlike the dotcom bubble. While this is a good thing in the long term, it can increase risk for investors in the short term if the return on investment from AI does not materialize quickly.
The recent success of the U.S. stock market is prompting retirement investors to look for ways to reduce their stock exposure and stay invested without taking on too much stock risk, while sitting on large portfolio gains. More retirees are putting their money into equity income-generating ETFs to create what fund managers in the space claim will be a smoother path forward.
Buffered ETFs, also called defined outcome ETFs, use options to protect against certain levels of losses while still capturing some of the upside. They have grown exponentially since the pandemic as an additional avenue for investors who have always used bonds and short-term Treasuries to buffer stock market downturns and generate income.
“It’s been a very rapid development,” TrueShares ETF CEO Mike Loukas said on CNBC. “ETF Edge.”
According to a Morning Star The cushioned ETF category returned about 11% annually over five years, according to an April report. Assets in the category have grown to over $30 billion, with billions of dollars of new inflows each year.
“A huge amount of wealth is moving from the accumulation phase to the distribution phase. Now a lot of these investors still need growth, but they need growth with risk protection and defined outcome space,” Loukas said. he said.
This also means there’s been a major shift in investor mindset, with fewer investors focused on keeping up with or beating the S&P 500. According to Loukas, retirees now aim for what he calls “good enough performance”—stable, predictable returns that match their comfort level.
But in addition to delay, there is another trade-off as a result of the nature of strong bull markets: higher costs. Buffered ETFs typically charge approximately 0.75% to 0.85% on annual feescompared to 0.03% for a straight stock index ETF like Vanguard’s VOO or SPDR S&P 500 SPY. But for retirees focused on capital preservation, diversification and peace of mind, the extra cost may be worth it.
“These are essentially math-based products,” Loukas said. “Usually they will deliver what they need to deliver.”
Largest cushioned stock ETFs
- FT Vest Laddered Buffer ETF (BUFR): $7.9 billion assets/0.95% net expense ratio
- Innovative Definition Wealth Shield ETF (BALT): $1.9 billion assets/0.69% net expense ratio
- FT Vest Laddered Deep Buffer ETF (BUFD): $1.5 billion assets/0.95% net expense ratio
- Innovator Equity Managed Floor ETF (SFLR): $1.2 billion/0.89% net expense ratio
Source: ETFAction.com
