The first U.S. exchange-traded fund ("ETF") debuted in 1993... And nobody cared.
This 'Protective ETF' Will Kill Your Returns
By Joe Austin, senior analyst, Chaikin Analytics
The first U.S. exchange-traded fund ("ETF") debuted in 1993...
And nobody cared.
Well, at least not many folks at first...
That January, State Street Global Advisors introduced the Standard & Poor's Depositary Receipts. Two decades later, this ETF is now known as the SPDR S&P 500 Fund (SPY).
The move gave retail investors access to passive index funds.
Then, in 1998, the asset manager added sector-specific ETFs.
But most people still just stuck to what they knew. They kept making regular deposits into their 401(k) mutual funds. And ETFs didn't even cross 1% of all fund trading until 2000.
A shift took place as asset managers developed more ETFs...
The SPDR Gold Shares (GLD) became the first commodity ETF in 2004. In 2006, ProShares added leveraged and inverse ETFs. And actively managed ETFs came around in 2008.
Folks could pick from nearly 1,000 U.S. ETFs by the end of that decade. Their amount of assets under management ("AUM") topped $1 trillion for the first time in late 2010.
ETFs have become even more popular over the past 15 years...
More than 3,600 ETFs trade in the U.S. today. And their total AUM exceeds $10 trillion.
But not every type of ETF is good for you as an investor...
For example, a lot of investment advisers are currently selling one type of ETF as a form of downside protection. And yet, as I'll show you, it's not a smart move for your wealth.
Instead, you're better off taking a tried-and-true approach...
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First, I'm talking about "buffer" ETFs. They're also known as defined-outcome ETFs.
With a buffer ETF, the fund manager lays out all the possible outcomes from the start. The goal is to limit investors' losses over a specific period – usually one year.
That's why a lot of investment advisers have turned to them for downside protection.
These ETFs also cap the potential upside, though. They form a "buffer zone."
Innovator Capital Management created the first buffer ETFs in August 2018. And this type of ETF has grown significantly since then...
As of last August, the U.S. market featured 327 buffer ETFs. They combined for nearly $55 billion in AUM. That's up from 73 buffer ETFs and less than $5 billion in AUM in 2020.
But as I said, buffer ETFs aren't the best choice for your money...
Most buffer funds use options. That's the "magic" behind the scenes.
However, as regular readers know, options can be risky for uninformed investors...
Among other things, they come with a higher level of "counterparty risk." That's when the other person can't keep their end of the deal if something chaotic happens.
Put simply, buffer funds underwhelm from a risk-reward standpoint...
They only offer limited protection. And if the market goes down, you can still lose money.
Plus, the market goes sideways or up most of the time. So when that happens, you've shelled out good money for nothing.
You'll underperform the market and miss the power of dividends. Over the long run, that misstep can cost you more than you think...
Last year, a report from mutual-fund giant Hartford Funds looked at the S&P 500 Index's performance from 1960 to 2023. And as you can see, the results are staggering...
The S&P 500 itself would've taken a $10,000 investment to $796,432 by the end of 2023. That's a solid return, of course.
But reinvesting dividends would've resulted in $5,118,735 over the same period.
That's the power of reinvesting dividends and compounding your wealth.
If you tie up some of your money in a buffer fund, you're selling yourself short.
So in the end, my recommendation is simple...
ETFs are more popular than ever today. And they'll only get more popular from here.
But not every ETF is good for you.
Buffer ETFs can cost you a lot of money over the long run. Don't let your investment adviser tell you otherwise.
Good investing,
Joe Austin
Market View
Major Indexes and Notable Sectors
# Hld: Bullish Neutral Bearish
Dow 30
-0.76%
11
13
6
S&P 500
-0.53%
99
246
153
Nasdaq
-0.15%
30
50
20
Small Caps
-0.9%
409
1041
455
Bonds
-0.66%
— According to the Chaikin Power Bar, Small Cap stocks and Large Cap stocks remain somewhat Bearish. Major indexes are mixed.
* * * *
Sector Tracker
Sector movement over the last 5 days
Communication
+1.96%
Health Care
+1.77%
Staples
+1.39%
Financial
+1.22%
Discretionary
+0.94%
Materials
-0.24%
Real Estate
-0.31%
Industrials
-1.93%
Utilities
-2.03%
Information Technology
-3.55%
Energy
-4.02%
* * * *
Industry Focus
Bank Services
35
54
6
Over the past 6 months, the Bank subsector (KBE) has underperformed the S&P 500 by -0.14%. However, its Power Bar ratio, which measures future potential, is Very Strong, with more Bullish than Bearish stocks. It is currently ranked #5 of 21 subsectors and has moved up 4 slots over the past week.
Top Stocks
BK
The Bank of New York
APO
Apollo Global Manage
ZION
Zions Bancorporation
* * * *
Top Movers
Gainers
BEN
+10.37%
EMN
+7.53%
VRTX
+5.31%
ABBV
+4.7%
KEYS
+4.59%
Losers
DECK
-20.51%
WBA
-10.3%
RMD
-8.33%
PPG
-6.0%
GWW
-5.63%
* * * *
Earnings Report
Reporting Today
Rating
Before Open
After Close
PLTR
MCD, TRMB, TSN
CLX, EG, NXPI, STX
DOC, EQR, IDXX
No earnings reporting today.
Earnings Surprises
PSX Phillips 66
Q4
$-0.15
Beat by $0.08
CHTR Charter Communications, Inc.
Q4
$10.10
Beat by $0.96
XOM Exxon Mobil Corporation
Q4
$1.67
Beat by $0.12
LYB LyondellBasell Industries N.V.
Q4
$0.75
Beat by $0.05
BR Broadridge Financial Solutions, Inc.
Q2
$1.56
Beat by $0.07
* * * *
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